Bernanke: Economic outlook has worsened

“Our economy is clearly in trouble,” said the committee’s chairman, Sen. Christopher Dodd, D-Conn. Restoring investor and consumer confidence, he said, is critical “if we are going to get back on our feet again.”

Bernanke said his forecast is for the economy to continue to endure a “period of sluggish growth.” That would be “followed by a somewhat stronger pace of growth starting later this year” as the effects of the Fed’s rate cuts and a newly enacted stimulus package begin to be felt. The $168 billion package, which includes rebates for people and tax breaks for businesses, was speedily passed by Congress last week and signed into law on Wednesday by President Bush.

Sen. Richard Shelby, R-Ala., was skeptical, saying he thought the energizing impact of rebates would be “negligible” and likened the action to “pouring a glass of water into the ocean.”

Even though Bernanke’s forecast envisions an improving economic picture later this year, the Fed chief said it was nonetheless “important to recognize that downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated” or that credit will become even harder to secure.

That’s why, for now, Bernanke indicated the Fed is still inclined to lower interest rates.

Yet, that could change, depending on how the economy and inflation unfold.

“A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives” of promoting healthy employment and economic growth while keeping inflation under control.

Sen. Robert Menendez, D-N.J., criticized policymakers for what he believed was a too slow response to the housing crisis. “We count on those at the top ... to sound an alarm,” during a crisis, he said. Instead, “what we got was a snooze button ... we’ve been behind the curve.”

Noting spreading credit problems, Sen. Charles Schumer, D-N.Y., asked whether policymakers underestimated the severity of the situation.

Replied Paulson: “It’s one thing to identify a problem. It’s another thing to know exactly what to do about it.”

Meanwhile, Paulson said the administration’s efforts to help people at risk of losing their homes is paying off.

Paulson said that in the final three months of last year, more than 470,000 homeowners got help from companies servicing their mortgages and almost 30 percent of those received a loan modification. He insisted the administration was working hard to help, and called the problems facing some struggling homeowners “heartrending.”

In terms of clues for an economic turnaround, Bernanke said the Fed would need to see signs of stabilization in the housing and labor markets and improvements in credit markets. For now, he said, the Fed doesn’t expect a “rip roaring” jobs market. Employers in January cut jobs for the first time in more than four years.

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