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DARKER DAYS AWAIT U.S. ECONOMY

Housing, credit woes have the Fed ready to revisit interest rate cuts.
 
Published Feb. 15, 2008|Updated Feb. 15, 2008

Using words like "sluggish" and "deteriorated," Federal Reserve Chairman Ben Bernanke gave a starkly pessimistic assessment of the nation's economy Thursday and signaled that the Fed will further cut interest rates, if needed, to combat the adverse effects of a prolonged housing slump and a severe credit crisis.

Both Bernanke and Treasury Secretary Henry Paulson told a congressional hearing that the economy could still avert a recession, but Democrats said they believed the government should be doing much more to help millions of Americans cope with a threatened tidal wave of mortgage foreclosures.

Bernanke told the Senate Banking Committee that the serious housing slump and a credit crisis triggered by rising defaults in subprime mortgages had greatly strained the economy.

He noted that hiring has slowed, with job creation falling by 17,000 in January, the first such setback in more than four years. He said the weaker labor market along with recent declines in stock prices and declining home prices are likely to be a drag on consumer confidence going forward.

The Fed chief told senators the "virtual shutdown" of the market for subprime mortgages given to people with blemished credit histories or low incomes has aggravated problems in the housing market. "Further cuts in homebuilding and in related activities are likely," he said.

Bernanke said that in his own economic forecast he did not predict a recession but a period of sluggish growth "followed by a somewhat stronger pace of growth starting later this year" as the impacts of the Fed's rate cuts and the $168-billion economic stimulus package of tax rebates begin to be felt.

On Wall Street, Bernanke's comments pushed stocks lower. The Dow Jones industrials fell 175.26, or 1.4 percent, to 12,376.98.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 18.35, or 1.34 percent, to 1,348.86, and the Nasdaq composite index fell 41.39, or 1.74 percent, to 2,332.54.