- The Washington Times - Wednesday, September 24, 2008

UPDATED:

WASHINGTON (AP) Federal Reserve Chairman Ben Bernanke said Wednesday that the worsening financial crisis could prove a major weight on U.S. business growth and pledged to “act as needed” to brace the wobbly economy.

Bernanke and his Fed associates are fighting the biggest financial debacle since the Great Depression. On Wednesday, the Fed chief faced a second straight day of tough questioning on Capitol Hill about the Bush administration’s proposed $700 billion bailout plan.

Lawmakers have voiced skepticism about the plan aimed at shoring up troubled financial institutions and markets.

Bernanke has been trying to reassure the country that the Fed will do what it can to provide relief. Some analysts think interest rates might be lowered again soon.

Bernanke appeared much more concerned about the stumbling economy right now, than about the prospects of inflation getting out of control. The slowing economy should cause inflation to moderate later this year and next, he said.

In testimony to Congress’ Joint Economic Committee, Bernanke repeated his warning of dire economic consequences if the bailout isn’t enacted and if credit woes persist. Neither businesses nor consumers would be able to borrow money, he said, adding that such a scenario could result in the world’s largest economy grinding to a virtual halt.

“The intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant drag on growth,” Bernanke said. “The downside risks to the outlook thus remain a significant concern.”

All told, the economy is likely to turn in a subpar performance in the second half of this year, Bernanke said. Consumers are expected to rein in their spending as unemployment rises, paychecks shrink and the energizing impact of the government’s tax rebates disappears. Slowdowns overseas aren’t helping, Bernanke said, noting that they’ll cause American export growth to recede.

“Economic activity appears to have decelerated broadly,” Bernanke said.

If credit stresses drag on, he warned lawmakers Tuesday, the economy could actually shrink, more jobs will be lost and foreclosures already at record highs will rise even more.

Although Bernanke welcomed the recent retreat in oil prices from the all-time high of $147.27 a barrel reached in mid July, he said the central bank must remain vigilant because the situation can turn quickly. Oil prices are up about $15 in the past week. Such fluctuations in oil prices in the past few days illustrate the difficulty of predicting the future course of prices, Bernanke said.

Last week, the Fed decided to hold its key interest rate steady at 2 percent for the third straight meeting. However, it struck a more bearish tone on the economy, hinting that rates could go lower if conditions seriously deteriorate. Earlier this year, the Fed had halted its most aggressive rate-cutting campaign in decades out of fear that the low rates were aggravating inflation. Financial turmoil, however, has now overwhelmed those concerns.

“Stabilization of our financial system is an essential precondition for economic recovery,” Bernanke told lawmakers on Wednesday.

To that end, the Fed chief urged Congress to act quickly on the administration’s bailout plan.

Story Continues →