Fed Chief Offers Hint of Rate Cut

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Fed Chief Offers Hint of Rate Cut
Bernanke Predicts 'Headwinds' For Consumers

By Neil Irwin
Washington Post Staff Writer
Friday, November 30, 2007; D01



The chairman of the Federal Reserve said last night that the central bank would take into account recent deterioration in the financial markets as it decides whether to cut interest rates next month.

Hours earlier, the White House released its economic forecast that acknowledged housing would be a drain on the economy next year, but it said tightening credit conditions would not stall business expansion.

The separate developments show how the Fed and the administration are grappling with a deterioration in the housing and credit markets as they set a course for the nation's economic policy. This month, new strains on global markets for debt have emerged, leading many economists to think there is greater risk of a recession.

Ben S. Bernanke, the chairman of the Fed, laid out in a speech to the Charlotte Chamber of Commerce how he is thinking through the economic situation as the central bank's policymaking committee prepares to meet Dec. 11. He noted that, by many measures, the labor market is doing well, with job growth and wages both on the rise.

But he said household spending appears to be softening, and that "the combination of higher gas prices, the weak housing market, tighter credit conditions and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead."

Bernanke said that the central bank was monitoring inflation closely, but he notably did not repeat language describing the risks of inflation and slower growth as "roughly balanced." Rather, he indicated that worsening conditions in the markets for many kinds of debt could slow the economy.

"These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors," Bernanke said.

Along with comments by Fed Vice Chairman Donald Kohn on Wednesday, Bernanke's speech signaled that the central bank was more inclined to cut a key short-term interest rate at its Dec. 11 meeting than it had indicated since its last meeting, Oct. 31. Credit markets appeared to be on the mend then, before tightening again in November.

The Bush administration, meanwhile, acknowledged yesterday that the housing downturn would slow growth next year, but was more optimistic than the Fed and many private forecasters.

In its semiannual forecast, the Council of Economic Advisers predicted that the gross domestic product would grow 2.7 percent in 2008. It had previously projected 3.1 percent growth. The White House also expects unemployment to edge up, to 4.9 percent from its current 4.7 percent.

"We have been hit with a pretty significant decline in the housing market," said Edward P. Lazear, chairman of the council, explaining the reduced projections.

However, he said he didn't think the worsening conditions in credit markets would make it harder for consumers and businesses to borrow money and thus cause a broader downturn.

"The credit market tightening we've seen is certainly a concern," Lazear said in a conference call with reporters. "But for the most part, that has not made its way into what I think of a the real economy." He said companies were earning enough money to fund expansion with their own cash stockpiles.

The Fed and most private forecasters expect the economy to soften more significantly than the White House does, as problems in the housing and credit markets make consumers less inclined to spend money and make it more expensive for businesses to expand.

In projections released this month, the 17 top Fed officials' projections for 2008 GDP growth ranged from 1.6 percent to 2.6 percent -- meaning that the most optimistic of those policymakers was less optimistic than the White House. A survey of 50 economists by the National Association of Business Economics reported a consensus forecast of 2.6 percent GDP growth next year.

Some Democrats said that the Bush administration was not grappling with the risks to the economy sufficiently. "The administration continues to see the economy through rose-colored glasses," said Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee.

Also yesterday, new data confirmed that the U.S. economy was on strong footing in late summer as the credit crisis started to unfold. The Commerce Department revised its estimate of gross domestic product, the total value of all goods and services produced in U.S. borders, to an annualized growth rate of 4.9 percent in the third quarter (it had earlier estimated 3.9 percent).

That revision, which was widely expected, shows that strong exports and investment in commercial real estate kept the U.S. economy humming from July through September, despite a sharp drop in the housing market.

But some sources of that gain -- for example, businesses accumulated inventory rapidly -- are likely to dissipate in coming months. If businesses let their inventories deplete, that would register as a drag on GDP.

Moreover, GDP data offer little insight into the economic outlook.

"It would be nice if it was giving us some signal of what was going to happen in the future," said Nigel Gault, U.S. economist at consulting firm Global Insight. "Unfortunately it's not."