- The Washington Times - Thursday, February 28, 2008

From combined dispatches

Federal Reserve Chairman Ben S. Bernanke yesterday signaled the central bank is prepared to lower interest rates again, even as inflation accelerates.

New economic data showing continued declines in new home sales and prices and a drop in durable goods orders raised the stakes for a Federal Reserve trying to lift the faltering economy without fanning price pressures.

The Fed “will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” Mr. Bernanke said in testimony to the House Financial Services Committee.

Mr. Bernanke’s remarks may reinforce investors’ expectations that policy-makers will lower rates further. While officials have expressed concern that inflation is accelerating, Mr. Bernanke indicated he shares Vice Chairman Donald Kohn’s view that financial market turmoil and slowing growth pose the “greater threat.”

New reports from the Commerce Department yesterday showed the U.S. expansion, now in its seventh year, is in peril.

New-home sales fell 2.8 percent last month, the third-straight monthly decline, to the lowest level since February 1995.

Sales fell by 10.3 percent in the Northeast and dropped by 7.6 percent in the Midwest and 2.4 percent in the South.

Median new-home prices slid a record 15 percent from a year ago to the lowest level in more than three years. The median price dropped to $216,000 last month, down 4.3 percent from December, according to the Commerce Department.

Analysts think housing activity has further to fall as a tidal wave of mortgage foreclosures is dumping more unsold homes on an already glutted market.

In another sign of trouble, orders to U.S. factories for big-ticket manufactured goods plunged last month by the largest amount in five months, an indication that manufacturers are being caught in the weakness engulfing the rest of the economy.

The greater-than-expected 5.3 percent drop reflected declines across a wide swath of industry from commercial aircraft and autos to heavy machinery and computers.

“The Fed is in full risk-management mode, which means it has to prioritize financial market stability and growth over inflation,” said Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago. “The discussion of inflation and inflation expectations, however, effectively sets the stage for a fairly quick normalization of rates once growth stabilizes.”

Mr. Bernanke referred to “downside” risks for the economy four times in his testimony, and noted that data since the last Fed meeting last month pointed to “sluggish” growth. Policy choices have also become more complicated as energy and commodity prices rose in recent weeks, he said.

Inflation is picking up and the public’s expectations for prices may also be rising, Mr. Bernanke said.


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