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Fed chief: Outlook for US economy has worsened

US Federal Reserve Chairman Ben Bernanke told Congress Thursday that the outlook for the economy has worsened in recent months and the central bank is ready to act “as needed” to support growth.

“In part as the result of the developments in financial markets, the outlook for the economy has worsened in recent months, and the downside risks to growth have increased,” said Bernanke in his testimony to the Senate Banking Committee. To date, the Fed chief said, the largest economic effects of the financial turmoil appear to have been on the housing market, which has deteriorated significantly over the past two years or so. “Further cuts in home-building and in related activities are likely,” he cautioned. Conditions in the labor market have also softened, Bernanke said. “The softer labor market, together with factors including higher energy prices, lower equity prices, and declining home values, seem likely to weigh on consumer spending in the near term,” he noted.

On the inflation front, Bernanke said inflation expectations, to date, appear to have remained reasonably well anchored. “But any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank’s policy flexibility to counter shortfalls in growth in the future,” he pointed out. He said the Federal Reverse “will be closely monitoring inflation expectations and the inflation situation more generally” in the months ahead. The economy will endure “a period of sluggish growth,” Bernanke forecast. That will be “followed by a somewhat stronger pace of growth starting later this year” as the effects of the Fed’s rate cuts and a newly enacted economic stimulus package begin to be felt, he estimated.

The $168 billion package, which includes rebates for people and tax breaks for businesses, was speedily passed by Congress last week and signed into law on Wednesday by President George W. Bush. Although the forecast envisions an improving picture, Bernanke said “it is important to recognize that downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further.” The Fed will be carefully evaluating incoming information bearing on the economic outlook and “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” the central bank chief said. (