Fed Chief Promises Action to Boost a 'Distinctly' Weaker Economy

WASHINGTON — Federal Reserve Chairman Ben Bernanke said Wednesday the U.S. economy has "slowed sharply," and indicated he would push for more interest rate cuts to avert a recession.

"The economic situation has become distinctly less favorable" since July, when the Fed last reported to Congress on the state of the economy, he said. "It is important to recognize that downside risks to growth remain."

Bernanke promised that the central bank "will act in a timely manner as needed."

Economists generally took that to mean that the Fed's policy makers plan to cut interest rates by another half percentage point when they meet March 18. The Fed already has lowered the rate at which banks lend to each other by 2.25 percentage points since September. The rate now stands at just 3 percent.

If the Fed does cut the federal funds rate again, lenders on Main Street will follow up by reducing the cost of loans for cars, business expansions, credit cards and more.

The prospect of such economic stimulus helped the stock market gain ground for the fourth straight day. The Dow Jones industrial average added 9.36 points to close at 12694.28.

Despite any short-term help lower interest rates might offer, Bernanke still sees a lot of troubles ahead.

"The housing market is expected to continue to weigh on economic activity in coming quarters," he said in his testimony before the House Financial Services Committee. Even nonresidential construction "is likely to decelerate sharply," he said.

Shoppers are feeling the pinch too, he said, noting that spending "appears to have slowed significantly." At the same time, businesses are showing "signs of being affected by the difficulties in the housing and credit markets," he added.

Last week, the Fed lowered its growth forecast for this year's gross domestic product by 0.5 percentage point, to a range of 1.3 percent to 2 percent. The Fed is not forecasting a recession, which is defined as two straight quarters of a shrinking GDP. Still, that slow pace can be painful.

Although Bernanke is eager to keep cutting rates to help growth, he also has to worry about inflation, which has been rising along with oil prices.

This is where the Fed's job gets tricky. When U.S. interest rates fall, it tends to depress the value of the U.S. dollar on world currency markets.

As a result, when a U.S. retailer shops at factories around the world for goods to stock its shelves, its dollars buy less. So it has to raise its retail prices for U.S. consumers.

On Wednesday, currency investors around the world concluded the Fed would keep cutting rates, so they kept dumping the dollar, sending the euro's value to a record high of more than $1.50.

Bernanke said he is keeping a wary eye on U.S. prices and sees some "slightly greater upside risks" there.

But he also thinks the inflation problem may recede this year. "Inflation could be lower than we anticipate if slower-than-expected global growth moderates the pressure on the prices of energy and other commodities," he said.

House Financial Services Committee Chairman Barney Frank, D-Mass., said he has sympathy for the "complicated" choices facing Bernanke now that the country is facing a mix of weak growth and rising prices, often referred to as stagflation.

Committee members also asked Bernanke about the housing downturn. The Fed chief said he hoped real estate would "stop being such a big drag" on U.S. economic growth "by later this year."

But he tried to steer away from assigning specific blame for the problem.

Frank contended that the mortgage crisis resulted from Congress's failure to prevent bad lending practices. "The single biggest cause was excessive deregulation," Frank said, arguing that for the free market to flourish, a government-backed regulator must "provide a set of rules that diminish abuses."

Rep. Tom Price, R-Ga., tried to spur Bernanke to dispute that conclusion, asking if the Fed agrees that the mortgage market crashed "due to the lack of regulation."

"Appropriate regulation combined with market forces can provide the best results," Bernanke said.

Price pressed him: "Is over-regulation possible or harmful?"

Bernanke replied: "Of course, it's possible." But he avoided specifics, saying, "I think there were mistakes in terms of regulation and oversight, but ... there were a lot of factors involved."