Fed chief has 'significant concern' on US economy

24 September 2008 17:22  [Source: ICIS news]

WASHINGTON (ICIS news)--Federal Reserve Board Chairman Ben Bernanke told Congress on Wednesday that he has “significant concerns” for the US economy, warning that slowing business investment and lower export sales are likely to drag the nation’s economy down further.

 

Testifying before the Joint Economic Committee in Congress in his regular semi-annual economic outlook, Bernanke said “the US economy continues to confront substantial challenges, including a weakening labour market and elevated inflation”.

 

The Fed chairman took the occasion to again urge Congress to approve the Treasury Department’s controversial $700bn (€490bn) mortgage loan bailout plan.

 

“Ongoing developments in financial markets are directly affecting the broader economy through several channels, most notably by restricting the availability of credit,” he said.

 

“Action by the Congress is urgently required to stabilise the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy,” Bernanke said.

 

The financial crisis has led banks nationwide to tighten credit terms and rates, the Fed chief said. 

 

“When worried lenders tighten credit, then spending, production and job creation slow,” he said.

 

Citing job losses, increasing claims for unemployment insurance, an unemployment rate at 6.1% in August and a decline in families’ after-tax income, Bernanke said the long-running housing sector decline has infected the broader economy.

 

“The weakness in real income together with the restraining effects of reduced credit flows and declining financial and housing wealth have begun to show through more clearly to consumer spending,” he said.

 

The undermining of consumer confidence and willingness to spend poses a serious threat to the national economy as a whole, Bernanke indicated. 

 

Consumer spending is the driving force of US economic activity, accounting for as much as 70% of commerce.

 

In addition to the decline in the consumer sector, Bernanke said that business outlays for equipment, software and office and production facilities - which had remained relatively strong despite the sub-prime mortgage crisis - now “appear poised to slow in the second half this year”, he said.

 

Furthermore, Bernanke said, while US export sales have been robust over the last two years and have helped offset to some extent the decline in domestic business, “in recent months the outlook for foreign economic activity has deteriorated amid unsettled conditions in financial markets, troubled housing sectors and softening sentiment”.

 

“As a consequence, in coming quarters the contribution of net exports to US production is not likely to be as sizable as it was in the first half of the year,” Bernanke said.

 

Bernanke, who is to testify later on Wednesday before the House Finance Committee about the bailout plan, concluded by cautioning that “stabilisation of our financial system is an essential precondition for economic recovery”.

 

($1 = €0.70)

 

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