Doomsday101
02-14-2008, 12:18 PM
NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson both acknowledged problems in the U.S. economy Thursday, but both said they believe the nation will avoid falling into recession.
However, the two added at a hearing before the Senate Banking Committee that official 2008 growth forecasts made late last year by the central bank and the president's Council of Economic Advisors are likely to be lowered in the coming months.
The Fed is currently predicting 1.8% growth for this year but Bernanke said a new forecast would be finalized next week. The Council of Economic Advisors' most recent estimate was for the economy to grow by 2.7% in 2008.
In their prepared testimony, the head of the central bank and the Bush administration's point man on the economy said steps taken already this year will be able to keep the economy moving forward despite the continued downturn in housing and troubles in credit markets.
"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 stimulus begin to be felt," said Bernanke in his opening statement, referring to a series of Fed interest rate cuts and a $170 billion tax rebate and stimulus plan signed by President Bush Wednesday.
But Bernanke conceded that banks are getting tighter in their lending standards, the housing and home building markets are likely to weaken further and the labor market may be softening.
"More-expensive and less-available credit seems likely to continue to be a source of restraint on economic growth," he said.
The Fed last month made two deep rate cuts: three-quarters of a percentage point at an emergency meeting, followed by half a point eight days later.
Bernanke said Thursday that the Federal Open Market Committee, its rate-setting body, was ready to act again if further economic readings justify it.
"The FOMC 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.
Economy is 'fundamentally strong'
Paulson echoed frequent comments he's made in recent weeks that he expects slower growth but no recession, even with the problems faced by the economy.
"The U.S. economy is fundamentally strong, diverse and resilient, yet after years of unsustainable home price appreciation, our economy is undergoing a significant and necessary housing correction," he said. "The housing correction, high energy prices and capital market turmoil are weighing on current economic growth."
A number of closely watched economic readings in recent weeks, including the January jobs report and the reading on business activity in the service sector, have convinced a growing number of economists that the economy is already in recession.
Bernanke repeated recent Fed statements that there are risks to the economy -- 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."
Investors didn't seem to like the cautious comments from Bernanke and Paulson. After three straight days of gains for the Dow and S&P, stocks sold off Thursday morning.
Bernanke: More bank losses but no failures
The Fed chairman also said that major banks and Wall Street firms are likely to report more losses from investments tied to subprime mortgages
But Bernanke added that he's not worried about bank failures because he thinks banks entered the current downturn with sufficient capital and have been able to raise additional funds.
"Certainly all the banks we supervise remain at strong capital positions and we don't see any imminent risk of any insolvency."
Senate Banking Chairman Christopher Dodd, D-Conn., opened the hearing by saying that the economy was at the greatest risk of any time since the Sept. 11 terrorist attacks. He said further steps need to be taken, adding that the slowdown is due to a crisis of confidence among both consumers and investors.
Dodd was critical of some of the Bush administration's housing efforts, including the freeze on foreclosures announced this week by Paulson and some of the country's leading mortgage lenders.
"It is a lifeline more to lenders than to borrowers in my view," said Dodd.
Sen. Richard Shelby of Alabama, the ranking Republican on the committee, also said he's concerned about the state of the economy and pointed out that surveys show economists believe the chance of a recession now stands at close to 50-50.
"One thing that is now clear to all of us is the subprime mortgage problems are not contained," said Shelby.
Shelby said he had doubts whether the stimulus package would prove to be effective.
"Even if every consumer spends their $600 tax rebate, I've equated it to pouring a glass a water in the ocean and expecting it to make a difference," Shelby said. "I hope I'm wrong."
Paulson on the defensive
There were also some testy exchanges during the hearing. Sen. Robert Menendez, D-NJ, pointed out that Paulson's former firm, Goldman Sachs (GS, Fortune 500), is one of the growing number of investment banks forecasting a recession this year.
"When the economy is at risk we expect all of you to sound the alarm. Instead you hit the snooze button," Menendez said.
Menendez said he wasn't trying to talk down the economy, but that he was looking for "honest assessments" from Paulson.
Paulson bristled at the comments, telling Menendez, "If you're trying to talk the economy up, I'd hate to see you talk it down."
Menendez shot back, "I'm just trying not to hide my head in the sand."
"I'm not either," responded the Treasury Secretary.
However, the two added at a hearing before the Senate Banking Committee that official 2008 growth forecasts made late last year by the central bank and the president's Council of Economic Advisors are likely to be lowered in the coming months.
The Fed is currently predicting 1.8% growth for this year but Bernanke said a new forecast would be finalized next week. The Council of Economic Advisors' most recent estimate was for the economy to grow by 2.7% in 2008.
In their prepared testimony, the head of the central bank and the Bush administration's point man on the economy said steps taken already this year will be able to keep the economy moving forward despite the continued downturn in housing and troubles in credit markets.
"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 stimulus begin to be felt," said Bernanke in his opening statement, referring to a series of Fed interest rate cuts and a $170 billion tax rebate and stimulus plan signed by President Bush Wednesday.
But Bernanke conceded that banks are getting tighter in their lending standards, the housing and home building markets are likely to weaken further and the labor market may be softening.
"More-expensive and less-available credit seems likely to continue to be a source of restraint on economic growth," he said.
The Fed last month made two deep rate cuts: three-quarters of a percentage point at an emergency meeting, followed by half a point eight days later.
Bernanke said Thursday that the Federal Open Market Committee, its rate-setting body, was ready to act again if further economic readings justify it.
"The FOMC 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.
Economy is 'fundamentally strong'
Paulson echoed frequent comments he's made in recent weeks that he expects slower growth but no recession, even with the problems faced by the economy.
"The U.S. economy is fundamentally strong, diverse and resilient, yet after years of unsustainable home price appreciation, our economy is undergoing a significant and necessary housing correction," he said. "The housing correction, high energy prices and capital market turmoil are weighing on current economic growth."
A number of closely watched economic readings in recent weeks, including the January jobs report and the reading on business activity in the service sector, have convinced a growing number of economists that the economy is already in recession.
Bernanke repeated recent Fed statements that there are risks to the economy -- 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."
Investors didn't seem to like the cautious comments from Bernanke and Paulson. After three straight days of gains for the Dow and S&P, stocks sold off Thursday morning.
Bernanke: More bank losses but no failures
The Fed chairman also said that major banks and Wall Street firms are likely to report more losses from investments tied to subprime mortgages
But Bernanke added that he's not worried about bank failures because he thinks banks entered the current downturn with sufficient capital and have been able to raise additional funds.
"Certainly all the banks we supervise remain at strong capital positions and we don't see any imminent risk of any insolvency."
Senate Banking Chairman Christopher Dodd, D-Conn., opened the hearing by saying that the economy was at the greatest risk of any time since the Sept. 11 terrorist attacks. He said further steps need to be taken, adding that the slowdown is due to a crisis of confidence among both consumers and investors.
Dodd was critical of some of the Bush administration's housing efforts, including the freeze on foreclosures announced this week by Paulson and some of the country's leading mortgage lenders.
"It is a lifeline more to lenders than to borrowers in my view," said Dodd.
Sen. Richard Shelby of Alabama, the ranking Republican on the committee, also said he's concerned about the state of the economy and pointed out that surveys show economists believe the chance of a recession now stands at close to 50-50.
"One thing that is now clear to all of us is the subprime mortgage problems are not contained," said Shelby.
Shelby said he had doubts whether the stimulus package would prove to be effective.
"Even if every consumer spends their $600 tax rebate, I've equated it to pouring a glass a water in the ocean and expecting it to make a difference," Shelby said. "I hope I'm wrong."
Paulson on the defensive
There were also some testy exchanges during the hearing. Sen. Robert Menendez, D-NJ, pointed out that Paulson's former firm, Goldman Sachs (GS, Fortune 500), is one of the growing number of investment banks forecasting a recession this year.
"When the economy is at risk we expect all of you to sound the alarm. Instead you hit the snooze button," Menendez said.
Menendez said he wasn't trying to talk down the economy, but that he was looking for "honest assessments" from Paulson.
Paulson bristled at the comments, telling Menendez, "If you're trying to talk the economy up, I'd hate to see you talk it down."
Menendez shot back, "I'm just trying not to hide my head in the sand."
"I'm not either," responded the Treasury Secretary.