Federal Reserve Chairman Ben S. Bernanke indicated that policy makers are prepared to lower interest rates further as the economy continues to deteriorate.
The Fed ``will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,'' Bernanke told the Senate Banking Committee in Washington today. ``A significant worsening in financial conditions or in credit availability would certainly be a warning bell that we need to take further action.''
Fed officials have lowered their forecasts for economic growth after the U.S. lost jobs in January and consumer spending was threatened by falling home and stock values and rising energy costs, Bernanke said. Traders anticipate the central bank will cut rates a further half-point by March 18 after 2.25 percentage points of reductions since September.
Bernanke appeared at the hearing with Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox, the first time the heads of the three agencies testified together on the economy at the panel since the aftermath of the Sept. 11, 2001, terrorist attacks.
The Fed chief acknowledged a widening impact on households and consumers from financial volatility, even after the central bank ``aggressively'' lowered interest rates.
Outlook `Worsened'
``More-expensive and less-available credit seems likely to continue to be a source of restraint on economic growth,'' Bernanke said. ``The outlook for the economy has worsened in recent months, and the downside risks to growth have increased.''
Bernanke provided less of a sense of urgency than in remarks last month, which preceded the fastest easing of monetary policy in two decades. Today, he left out the line from Jan. 10 and Jan. 17 speeches that the Fed stood ready to take ``substantive additional action.'' The chairman also omitted comments that policy makers ``must remain exceptionally alert and flexible'' and act in a ``decisive'' manner.
``He's setting the stage for at least slowing the pace of accommodation, but definitely not stopping it anytime soon,'' said Mike Feroli, an economist at JPMorgan Chase & Co. in New York. The firm expects a quarter-point reduction in the benchmark rate when policy makers next meet on March 18.
Futures Trading
Futures markets show traders expect the central bank to lower the rate to 2 percent by the end of June.
Treasury securities, which had fallen before Bernanke's testimony, were little changed after. Ten-year note yields rose to 3.78 percent at 10:48 a.m. in New York, from 3.73 percent late yesterday.
``They are still willing to be in a risk-management mode, lowering rates if the risks are elevated rather than waiting,'' said Julia Coronado, senior U.S. economist at Barclays Capital Inc. in New York. ``There is nothing here that leads us to change'' Barclays's forecast of a half-point move in March, she said.
Quarterly economic forecasts by Fed governors and district bank presidents are scheduled for release on Feb. 20. They will show ``weak but still positive'' growth in the first half of the year, Bernanke said today.
``My baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt,'' the 54-year-old Fed chairman said. ``Although the baseline outlook envisions an improving picture, it is important to recognize that downside risks to growth remain.''
Watching Inflation
Bernanke said ``in the months ahead'' Fed officials will be monitoring inflation closely. Over the year, the central bank will need to ``assess whether the stance of monetary policy is properly calibrated'' to meet the objectives of full employment and price stability, he said.
``To date, inflation expectations appear to have remained reasonably well anchored,'' Bernanke said. ``Our policy stance must be determined in light of the medium-term forecast for real activity and inflation, as well as the risks to that forecast.''
The worst housing slump in a quarter century has combined with lower stock prices and elevated inflation to sap household wealth.
The economy lost 17,000 jobs in January, the first drop in more than four years. The Standard & Poor's 500 Index has fallen three consecutive months, and is down 7.3 percent so far this year. Residential investment subtracted 1.2 percentage point from growth last quarter, the eighth straight decline, according to government statistics.
Threats to Spending
``The softer labor market, together with factors including higher energy prices, lower equity prices, and declining home values, seem likely to weigh on consumer spending in the near term,'' Bernanke said.
Paulson said in his testimony that the $168 billion stimulus package enacted this week will help buttress the economy. Tax rebate checks will be sent to more than 130 million Americans beginning in May, he said. The measure also includes investment incentives for businesses.
Still, economists such as Harvard University's Martin Feldstein said the plan may not keep the U.S. out of a recession.
``Even if it isn't avoided, will it be enough to cause this to be a modest downturn?'' Feldstein, president of the National Bureau of Economic Research, said in a Bloomberg Television interview on Feb. 12. ``We can't be sure because of the problems in the credit markets,'' he said, estimating the chance of a recession at ``close to 50-50.''
