Thursday, January 17, 2008
"We currently see the economy as continuing to grow, but growing at a relatively slow pace, particularly in the first half of this year," Bernanke told the Budget Committee of the U.S. House of Representatives, acknowledging that conditions were worse this year than in the "reasonably good" second half of 2007.
He insisted that despite valid concerns about the "slowing growth" of the
The scale of the repairs necessary was underscored as Merrill Lynch became the latest financial institution to report a staggering loss: $9.8 billion for the fourth quarter.
Even as Bernanke was testifying, the White House and the Congress were beginning to discuss an economic stimulus package. The White House said publicly for the first time that President George W. Bush favored a short-term stimulus effort, though it did not offer particulars. Bush is scheduled to spell out his criteria for the stimulus package in a speech Friday.
The House minority leader, Representative John Boehner, Republican of Ohio, told reporters that the package could cost $100 billion to $150 billion, but said there was "no firm number" yet for an "upper limit," Reuters reported.
Although Bernanke tried to steer his questioners away from the word "recession," he conceded in an exchange with Representative John Spratt Jr., the South Carolina Democrat who heads the panel, and Paul Ryan of Wisconsin, the ranking Republican, that the economy was being battered by an unusual and unsettling combination of problems and that growth would probably be slower in 2008 than last year.
Turmoil in the financial markets, rapid increases in oil prices and a badly slumping housing market are part of "a confluence of different events that makes this a difficult combination of circumstances," Bernanke conceded.
He said that any stimulus package should be "explicitly temporary," aimed at getting people to spend more in the next year or so without creating a heavy new load of national debt.
"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," Bernanke said, alluding to cuts in interest rates.
When he was asked whether he thought the "temporary" tax cuts, pushed through Congress several years ago when Republicans were in control, should be made permanent, Bernanke said he preferred not to take a stand on any specific tax or spending measure.
He acknowledged concerns about the latest employment figures, and said the labor market "will bear close attention." And while he forecast a "healthy" growth in American exports, he said "the financial situation remains fragile" at home, with the depth of losses among banks and other lending institutions not yet known.
Although Bernanke rejected the term "recession" for the present conditions and what lies ahead, he said the full effects of the housing slump and the accompanying mortgage mess had yet to be felt.
"Our expectation is that delinquencies will go higher and that there will be ongoing losses in the subprime area," he said. Asked to put a dollar figure on total losses, he said, "I see so far about $100 billion, but it certainly could be several multiples of that as we go forward and the delinquency rates and foreclosure rates rise."
Bernanke said that whatever action Congress took should be designed as a quick jolt to revive a languishing economy and that measures like spending on infrastructure or long-term tax relief, which might take months or years to be felt, would be counterproductive.
"Stimulus that comes too late will not help support economic activity in the near term, and it could be economically destabilizing if it comes at a time when growth is already improving," Bernanke said.
While he reiterated the Fed's usual concerns about the need for vigilance against inflation, he said that inflationary pressures should ease this year and next, as long as the public's confidence in the Fed is not shaken.
As the Congress considers what kind of stimulus package to pass, some Democrats have spoken about jobs programs or public spending, as well as quick tax rebates or extended unemployment compensation, while some Republicans have emphasized making tax cuts permanent.
The Fed's willingness to give a nod to fiscal stimulus is important. Many lawmakers will not support action without the chairman's blessing, and the double dose of stimulus that the Fed and the Congress are considering must be carefully calibrated.
If Bernanke opposed congressional action on the ground that spending increases and tax cuts would increase the budget deficit, the Fed might restrain its own effort to stimulate the economy with lower interest rates.
Bernanke's advice appears to be not to do too much too late.
"Fiscal measures that involve long lead times or result in additional economic activity only over a protracted period, whatever their intrinsic merits," he said, might well not provide stimulus when it is most needed.
Faced with growing evidence that the economy was slipping into a recession, congressional Democrats and Bush are trying to come up with a package that would put more money in Americans' hands within the next few months.
As the president, a Republican, was preparing to convene a conference call with congressional leaders Thursday afternoon to talk about the economy, the White House affirmed that it saw a need for a short-term economic stimulus package.
"The president does believe that over the short term in the economy that some boost is necessary," said Tony Fratto, deputy White House press secretary. "That's where his inclination is."
He said that Bush wanted to hear the views of congressional leaders, but he did not characterize the conference call as a negotiating session. Bush, who returned to the White House on Thursday after a
The tax cuts passed early in his administration are set to expire at the end of 2010. The president has said that he will work in his final year to make them permanent.
In his comments Thursday, Bernanke said that any stimulus program "should be explicitly temporary," in part to avoid adding to the federal government's structural budget deficit which would make it far harder, he said, for the nation to deal with long-term challenges associated with the aging of the population.
Bernanke portrayed a mixed economic picture of the financial turmoil prompted by the subprime mortgage crisis, high energy and food prices and other factors.
New data, he said, suggested that "the baseline outlook for real activity in 2008 has worsened and that the downside risks to growth have become more pronounced." Important factors, he said, were continuing increases in energy prices, lower equity prices and a softening of home values.
But some economic boost should come from abroad, Bernanke said.
In addition, he said, futures markets pointed to deceleration in food and energy prices over the coming year."Given these factors," Bernanke told the committee, "overall and core inflation should moderate this year and next, so long as the public's confidence in the Federal Reserve's commitment to price stability is unshaken." But, he added, "any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank's policy flexibility to counter shortfalls in growth."