US Fed chief says economy to remain weak in ‘08

15 July 2008 17:09  [Source: ICIS news]

WASHINGTON (ICIS news)--US growth will remain weak this year with consumer and business spending constrained by the continuing housing slump, increasing energy costs and tight credit, Federal Reserve Chairman Ben Bernanke told Congress on Tuesday.

 

In his semi-annual report to Congress on federal monetary policy, Bernanke said that actions taken this year by the Fed, the Treasury Department and the Securities and Exchange Commission (SEC) have been effective in countering expected weakness in the economy.

 

However, he said, “the economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labour market and rising prices of oil, food and some other commodities”.

 

He said that due to the ongoing housing market decline and the related crisis among financial institutions with bad mortgage loan debt, “many financial markets and institutions remain under considerable stress, in part because the outlook for the economy, and thus for credit quality, remains uncertain”.

 

“In general, healthy economic growth depends on well-functioning financial markets,” he told the Senate Banking Committee. “Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve.”

 

He noted that the US housing sector continues to weaken with “the rising tide of foreclosures” adding to the already large inventory of vacant homes for sale and aggravating downward pressure on home prices.

 

Bernanke said that consumer spending has increased a modest pace so far this year, “generally holding up somewhat better than might have been expected given the array of forces weighing on household finances and attitudes”.

 

Consumer spending is the principal driving force of US commerce, accounting for up to 70% of all economic activity.

 

“Overall, consumption spending seems likely to be restrained over coming quarters,” Bernanke said.

 

In addition, business spending likely will be constrained for the rest of this year, he said.

 

“Surveys of capital spending plans indicate that firms remain concerned about the economic and financial environment, including sharply rising costs of inputs and indications of tightening credit, and they are likely to be cautions with spending in the second half of the year,” he said.

 

Bernanke said that among the Federal Reserve Board’s governors, US economic growth “is projected to pick up gradually over the next two years as residential construction bottoms out and begins a slow recovery an as credit conditions gradually improve”.

 

However, he cautioned that those top economic officials in the Fed - the US central bank - “indicated that considerable uncertainty surrounded their outlook for economic growth and viewed the risks to their forecasts as skewed to the downside”

 

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By: Joe Kamalick
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