Bernanke Open to a Sizable Rate Cut; Job and Housing Markets May Worsen, Posing Risks To Growth, Fed Chief Says
WASHINGTON -- Federal Reserve Chairman Ben Bernanke warned that intensifying credit and financial-market pressures are likely to restrain economic growth and left the door open for a sizable interest-rate cut next month.</br></br>Mr. Bernanke, testifying at the Senate Banking Committee, said he expects "sluggish growth" in the economy and a "somewhat stronger pace" later in the year, thanks to rate cuts and fiscal stimulus. But he cautioned that housing and labor markets could deteriorate more than anticipated, emphasizing that "downside risks to growth remain."</br></br>Treasury Secretary Henry Paulson, at the same hearing, said the government's recent actions -- including the $168 billion economic- stimulus package and efforts to modify homeowners' mortgages -- would help soften the housing-market correction. But he warned that "those programs alone will not be sufficient . . . . It's going to take time and some pain before we work through this." Mr. Paulson urged action on legislation to overhaul the Federal Housing Administration and government-sponsored Fannie Mae and Freddie Mac, and, in response to questions, said the administration is willing to consider other housing-related proposals.</br></br>The Federal Reserve has slashed the target for its benchmark federal-funds rate to 3% from 5.25% last summer. Futures markets expect the Fed to lower interest rates half a point March 18. Traders put one-in-three odds on a three-quarter percentage point cut. The market odds remained largely unchanged yesterday by Mr. Bernanke's testimony.</br></br>Mr. Bernanke, who is likely to elaborate on the Fed's views when he delivers his semiannual report to Congress later this month, said market worries about mortgage defaults and the ripple effects of bond insurers' woes are contributing to tighter lending standards. "More- expensive and less-available credit seems likely to continue to be a source of restraint on economic growth," Mr. Bernanke said. Declining home values and a softening labor market -- along with higher energy costs and lower equity prices -- are likely to affect consumer spending, he added.