Fed chair issues gloomy forecast for economy
In somewhat gloomy testimony to the Joint Economic Committee of Congress, the central bank chair also noted that the falling dollar and rising oil prices are renewing inflation risks - with overall inflation likely to increase in the short run - even as business activity slows. The Fed's forecast for economic growth to pick up again next year could be at risk if financial markets don't calm down as anticipated or the housing downfall worsens, he said.
"Our assessment is for slower growth, but positive growth going into next year," Bernanke said. "We think that by the spring, early next year, that as these credit problems resolve and as, we hope, the housing market begins to find a bottom ... the economy (will) recover to a more reasonable growth pace."
Bernanke did not hint at future interest-rate policy, saying the Fed would monitor economic data and "act as needed." The Fed has cut a key interest rate to 4.5 percent from 5.25 percent since mid-September.
The most recent rate cut on Oct 31. was needed given forecasts for "sluggish" growth into next year, Bernanke said. Since that move, he said some data suggest the economy "remained resilient," but credit markets remain strained.
Bernanke got tough questions from lawmakers, including committee Chairman Sen. Charles Schumer, D-N.Y., who asked whether the risks of a downturn were rising. Bernanke said the central bank had "not calculated the probability of a recession."
Rep. Maurice Hinchey, D-N.Y., worried about a return to 1970s "stagflation," slow growth and high inflation. Bernanke said he didn't anticipate anything near the '70s.
Bernanke was also asked about the falling dollar, which has hit record lows against the euro. A Chinese official this week said that country's foreign-exchange policy should take advantage of currencies that were rising in value to offset currencies that are declining. That led to market worries that China would pull back from dollar-denominated assets.
Bernanke noted that wasn't an official Chinese government statement and said he doesn't see any "significant change in holdings" of the dollar. He said consumer spending could slow as home prices decline, adding, "We do not take an alarmist view" on the issue. He predicted falling home values would have a "relatively moderate" impact.
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