Fed Chairman Says Economy Likely to Slow

http://www.nytimes.com/2007/11/08/business/09fed-web.html?_r=1&hp&oref=slogin
WASHINGTON, Nov. 8 — Ben S. Bernanke, the chairman of the Federal Reserve, said today that the economy is likely to slow noticeably in the months ahead. But he gave no signal that the central bank might cut interest rates for a third time this year.

In written testimony presented to the Joint Economic Committee, Mr. Bernanke said the economy is being hit by the meltdown in housing, which has yet to reach its low point, as well as tighter credit conditions and the surge in oil prices.
When the central bank lowered its benchmark rate last week by a quarter-point, to 4.5 percent, Mr. Bernanke said, policy makers “expected that the growth of economic activity would slow noticeably in the fourth quarter” and would remain sluggish through the early part of next year.
But Mr. Bernanke suggested that the two rate cuts in September and October should be enough to prevent a recession, quickly adding that the central bank will be watching for new signs of trouble.
The most recent economic data since the Fed’s rate cut last Wednesday “continued to suggest that the overall economy remained resilient in recent months,” he said. At the same time, he acknowledged, investors’ fears about bad mortgage loans have intensified and could lead to tighter credit conditions. On top of that, he said, “further sharp increases in crude oil prices have put renewed upward pressure on inflation and may impose further restraint on economic activity.”
Asked whether he saw any risks of a recession, Mr. Bernanke demurred. Cautioning that “turning points” are extremely difficult to anticipate, he said the Fed is not anticipating a true economic contraction.
“We have not calculated the probability of a recession,” he said. “Our assessment is for slower growth, but positive.”
Policy makers, he continued, “will continue to carefully assess the implications for the outlook of the incoming economic data and financial markets and will act as needed to foster price stability and sustainable economic growth.”
Wall Street analysts, hoping to hear more willingness from the Fed about cutting rates, took little comfort in the chairman’s remarks.
“Mr. Bernanke gave no ground to the market’s desire for further easing,” wrote Ian C. Shepherdson, chief United States economist at High Frequency Economics in Valhalla, N.Y.
Mr. Bernanke’s carefully worded formulation about monitoring economic data included reminders that Fed officials are not simply worried about spillover from the housing and mortgage meltdowns, but about inflation as well. Indeed, Mr. Bernanke referred first to the Fed’s attention to price stability and second to its interest in sustainable growth.
But in saying the Fed was watching developments in “financial markets” as well as “incoming economic data,” Mr. Bernanke did not close the door to another rate cut based largely on continued turmoil on Wall Street.
Fed officials and several private analysts warn that growth could slow to a crawl, perhaps an annual rate of 1 percent, in the final months of this year. That would be a drastic downshift from an estimated pace of 4 percent in the third quarter.
But in reiterating that the Fed’s two existing rate cuts “should” prevent a severe downturn, Mr. Bernanke suggested that policy makers will not want to act unless they think growth will slow even further than the sluggish pace they already expect.
A number of analysts predicted that the economic growth would grind to a full stop by the end of this year, which would force the Fed’s hand.
Paul Ashworth, an economist at Capital Economics in London, predicted that the economy will be “stagnant at best” in the final quarter of this year, adding that surging oil prices could lead to an actual contraction of the economy.
“That would be a much weaker performance than the Fed is expecting and would probably be bad enough to get officials to change their minds,” Mr. Ashworth wrote in a research note on Thursday. “The only question is whether there is enough evidence of this slowdown available by mid-December — or whether we will have to wait until January for the next cut.”

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