MercoPress. South Atlantic News Agency

Fed admits outlook for US economy “has worsened”

United States Federal Reserve chief Ben Bernanke told Congress on Thursday that the US economic outlook had deteriorated but pointed out that the Fed will “act in a timely manner”.

Addressing the Senate Banking Committee Bernanke said that "the outlook for the economy has worsened in recent months, and the downside risks to growth have increased", but rate cuts totaling 2.25 percentage points in the past six months will filter through the economy and should aid growth in the second half. "Monetary policy works with a lag" Bernanke said. "At present, 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 stimuli begin to be felt." Bernanke told Congress the one-two punch of the housing and credit crises has greatly strained the economy. Hiring has slowed and people are likely to tighten their belts further, as they are pinched by high energy prices and watch the value of their single biggest asset â€" their homes â€" weaken, he warned. "To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so" Bernanke also said that the "virtual shutdown" of the market for subprime mortgages and a reluctance by lenders to make "jumbo" home loans have aggravated problems in the housing market. Bernanke appeared with Treasury Secretary Henry Paulson and Christopher Cox, chairman of the Security and Exchange Commission, amid increasing concerns that the economy may be drifting into recession. The Fed's chief comments sent oil prices soaring with markets falling: Nasdaq fell 1.7%, the Dow Jones 1.4% and the S&P 500 1.3%. Bernanke said his forecast is for the economy to continue to endure a "period of sluggish growth." That would be "followed by a somewhat stronger pace of growth starting later this year" as the effects of the Fed's rate cuts and a newly enacted stimulus package begin to be felt. The 168 billion US dollar package, which includes rebates for people and tax breaks for businesses, was speedily passed by Congress last week and signed into law on Wednesday by President Bush. "A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives" of promoting healthy employment and economic growth while keeping inflation under control. Inflation should moderate, Bernanke said. Yet last year's steep run-up in oil prices is a reminder that the Fed can't let down its inflation guard and must keep close tabs on the inflation expectations of investors, consumers and businesses. Those expectations can affect their behavior, which can affect the economy. "Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate" the Fed's job, he said. The troubles in the housing and credit markets threaten to push the economy into its first recession since 2001 â€" if it hasn't fallen into one already. Bernanke didn't speak of a recession and said his forecast still calls for growth, albeit slow growth. Paulson was hopeful the economy would be able to skirt a recession this year.