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Bernanke Signals More Cuts Amid Dim Outlook

The Fed chief pledges 'adequate insurance against downside risk.'

Federal Reserve

Chairman Ben Bernanke on Thursday offered a bleak economic outlook for the near term and signaled the central bank's willingness to continue to cut its target rate.

Bernanke expects a period of sluggish growth, followed by a "somewhat stronger pace of growth starting later this year" as the tax rebates and interest rate cuts begin to impact the economy, the Fed chief told the Senate's Committee on Banking, Housing and Urban Affairs. He noted the Federal Open Market Committee's aggressive rate cuts to battle tight interbank lending market that have resulted in a 225 basis point drop to the federal funds rate since September to its present 3%.


Federal Open Market Committee 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," Bernanke said.

Bernanke was joined by Treasury Secretary Henry Paulson and

Securities and Exchange Commission

Chairman Christopher Cox in testifying before the committee, chaired by Rep. Christopher Dodd (D., Conn.). Dodd said it was the first time the heads of the Fed, SEC and Treasury Department had appeared together before the committee since the aftermath of the Sept. 11, 2001 terrorist attacks on the Pentagon and World Trade Center.

Bernanke said further cuts in homebuilding and related activities are likely, as is more-expensive and less-available credit straining the economy. Additional subprime writedowns also appear likely in the short term. And while the chairman doesn't expect a "rip-roaring labor market," the Fed will be looking to see if it stabilized at current levels.

"It is important to recognize that downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further," said Bernanke.

Bernanke pledged to closely monitor economic indicators, specifically focusing on the housing, labor and credit markets, and react promptly to combat downside risks.

In recent weeks, the Federal Open Market Committee has pursued an aggressive interest rates policy. It slashed the federal funds rate 125 basis points in January, after having previously cut interest rates 100 basis points in the last four months of 2007.

President George Bush signed an economic stimulus package on Wednesday, which would give American households substantial tax rebates later this year. Some households can expect rebates as early as May, Paulson said. Rebate checks will continue to be rolled out over the summer, he said.