Bernanke: Gloomy on growth

Fed chairman says housing continues to hold down economy but hints that central bank is done cutting rates, saying 'policy seems well positioned.'

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By Aaron Smith, staff writer

NEW YORK ( -- Federal Reserve Chairman Ben Bernanke painted a gloomy picture of the economy on Tuesday but hinted that the central bank was prepared to hold steady on interest rate cuts.

"For now, policy seems well positioned to promote moderate growth and price stability over time," he said.

The Fed has already cut the key federal funds rate 7 times since September, to the current rate of 2%, down from 5.25% before the easing began.

Overall, however, he detailed myriad problems still facing the economy.

"[H]ouseholds continue to face significant headwinds, including falling house prices, a softer job market, tighter credit, and higher energy prices, and consumer sentiment has declined sharply since the fall," said Bernanke, addressing the International Monetary Conference in Barcelona via satellite.

At the same time, Bernanke said that some of the more troubled aspects of the economy are starting to show signs of stability. He said the battered financial markets had "improved of late but conditions remained strained." He also said the pressures on the U.S. economy are being softened somewhat by foreign demand for U.S. goods and services.

"We may see somewhat better economic conditions during the second half of 2008, reflecting the effects of monetary and fiscal stimulus," he said.

Commodity prices to cool

Bernanke also said he expects commodity prices to "level out" as the global economy slows, resulting in "a relatively rapid moderation of inflation."

But housing continues to stymie recovery.

"However, until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside," he said.

In May, the Fed lowered its economic forecast to growth between 0.3% and 1.2% for full-year 2008, down from its prior projection of 1.3% to 2%.

Going forward, Mark Zandi, chief economist of Moody's, said the Fed is unlikely to raise its fund rate until Bernanke believes that "the financial system is on firm ground" and that "the economy is growing, not flirting with recession."

Zandi said the current fund rate of 2% is "right where it should be" because it is less than the rate of inflation, based on the core CPI's rate of 2.3% over the last year.

On guard over inflation

Bernanke blamed the rising prices of consumer goods partly on the weakness of the U.S. dollar in the face of foreign currencies. He said that guarding against inflation will continue to be a focus for the Fed.

"Over time, the Federal Reserve's commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy - including flexible markets and robust innovation and productivity - will be key factors ensuring that the dollar remains a strong and stable currency," said Bernanke.

Bernard Baumohl, executive director of the Economic Outlook Group, said that Bernanke's statements send a strong signal to the rest of the world that "we know the dollar is falling, and we know the implications of the falling dollar."

But when it comes to inflation, Bernanke's hands are tied, and least for the time being, said Baumohl. He argued that the economy is too weak to support raising the fed funds rate.

"There is not much the Federal Reserve can do to help the dollar," said Baumohl. "It cannot raise rates now, because the economy is teetering on the edge of recession, if not in a recession." To top of page

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