Bernanke: More economic pain ahead

Posted October 7, 2008

— Federal Reserve Chairman Ben Bernanke warned Tuesday that the financial crisis has not only darkened the country's current economic performance but also could prolong the pain.

The Fed chief's more gloomy assessment appeared to open the door wider to an interest rate cut on or before Oct. 28-29, the central bank's next meeting, to brace the wobbly economy.

Bernanke said the Fed will "need to consider" whether its current stance of holding rates steady "remains appropriate" given the fallout from the worst financial crisis in decades.

If the Fed does lower its key rate from 2 percent, it would mark an about-face. The Fed in June had halted an aggressive rate-cutting campaign to revive the economy, fearing lower rates would aggravate inflation. Since then, financial and economic conditions have deteriorated, while record-high energy prices have calmed, giving the Fed more leeway to again cut rates.

Many believe the country is on the brink of, or already in, its first recession since 2001.

"The outlook for economic growth has worsened," Bernanke told the annual meeting here of the National Association for Business Economics.

All told, economic activity is likely to be "subdued" during the remainder of this year and into next year, Bernanke said. "The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth," he warned.

Consumers – major shapers of economic activity – have buckled under the weight of rising joblessness, shrinking paychecks, hard-to-get credit, declining net wealth and tanking home and stock values. All the strains are "now showing through more clearly to consumer spending," Bernanke said.

Inflation numbers are "very ugly right now," Bernanke acknowledged. Even so, he believed slowing growth in the United States and overseas will continue to damp prices for energy, food and other commodities, meaning a better inflation outlook ahead. Inflation will moderate "pretty significantly" over the next few quarters, he predicted.

Meanwhile, worsening sales prospects and a heightened sense of uncertainty have begun to weigh more heavily on businesses, making them less eager to hire and to invest in their companies, he said.

Employers cut jobs in September at the fastest pace in more than five years, the government reported last week. Payrolls shrank by 159,000 last month alone. It was the ninth straight month of job losses. Data show 760,000 jobs have disappeared so far this year.

The financial and credit crises, which took a turn for the worst in September and continue to stubbornly persist, are likely to "increase the restraint on economic activity in the period ahead," Bernanke said.

Even households with good credit histories are now facing difficulties obtaining mortgages or home equity lines of credit, he noted. Banks are also reducing credit card limits, and denial rates on auto loan applications are rising, he said.

Banks, too, are feeling the strain of a lockup in lending, particularly in the market for commercial paper.

To that end, the Fed on Tuesday announced a radical plan to buy massive amounts of this short-term debt in an effort to break a credit clog that is imperiling the economy.

"The expansion of Federal Reserve lending is helping financial firms cope with reduced access to their usual sources of funding," Bernanke explained.

Invoking Depression-era emergency powers, the Fed will begin buying commercial paper – short-term funding that many companies rely on to pay their workers and buy supplies.

Bernanke believed the Fed's bold actions – along with the $700 billion financial bailout that President Bush signed into law on Friday – will help restore confidence in financial markets and help them function more normally.

"These are momentous steps, but they are being taken to address a problem of historic dimensions," he said.

He also defended the timing of the actions by the Fed and the Bush administration. "We have learned from historical experience with severe financial crises that if government intervention comes only at a point at which many or most financial institutions are insolvent or nearly so, the costs of restoring the system are greatly increased. This is not the situation we face today," he said.


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  • thewayitis Oct 7, 2008

    bs101fly -- it's dems who caused this problem, not republicans. You ought to watch this video -- you would learn something.

  • bs101fly Oct 7, 2008

    Folks your 401K's are now 201K's, we are spending 10 BILLION a month in Iraq remember, and NOW we have to foot the bill for a bailout/handout and there WILL BE more bailout/handouts to come. McCain has stated several times, and it hasn't changed in just a few weeks, that "he knows nothing about the economy." A vote for McPalin will sink our American ship and there is NO doubt about that!
    The market has tanked AGAIN today, down over 500+, and your 201K will be a 159K by bedtime, and McPalin does NOT have the answers AT ALL!
    You better think before you vote!

  • davidgnews Oct 7, 2008

    the stench from DC is overwhelming! Sarge

    The country and the world would be far better off if it _just_wasn't_there_!

  • Cricket at the lake Oct 7, 2008

    DavidG, The $600 rebate isn't the tax cut AlleyOops was referring to. That was a redistribution of wealth, like Obama wants to do when he is president. That $600 check will cost taxpayers $1200 before it is finished being paid for. Real tax cuts are cuts in capital gains, death taxes, income taxes, ect. that truly fuel the economy.
    My question, how is the Fed going to begin buying commercial paper? Oh that's right - they just print up some more money.
    And how come the stock market rose when it looked like the "bail out" wouldn't pass but the market plunged when it was finally signed?

  • common_sense_plz Oct 7, 2008

    It is hight time that every one look and finally realize where the straw came from that broke the camels is and still remains Energy cost, including our own local power company increasing their rates 40%, oh, phased in of course, but still 40% non the less, 2,3 & 4 dollar a gallon gas, increase in natural gas, and oil. All these fall under energy. When these prices were allowed to rise at the rate in which they did, families has cut back, then men and women were laid off, because their companies could not afford to keep them on, because we were and still are cutting back. But for many families this was not enough, and they evenutally began stopped paying their mortgage. Still no one is doing anything regarding fuel prices. If you take a look at global gas prices you will see oil producing countries, have very cheap gas, but hten again I guess they do, they are making all their money from us, because Jimmy Carter made sure that we were limited in our oil production.

  • batcave Oct 7, 2008

    the worse is yet to come is a given, we will have the reverse of trickle down economics. sony ercison 450 are gone. People do have to live within means , don't keep up with the other guy.I know people who freely admit to declaring bank ruptcy some more than once---meaning the are also to dumb to realize the rest of us pay the debt.

  • bs101fly Oct 7, 2008

    well rock bottom it is then.
    down AGAIN over 500+ today and no end in sight.
    I predict 600+ tomorrow and more the next!
    WHEN will Americans take up their Palin loved arms and take to the streets? I predict that won't be long either!

  • Sarge Oct 7, 2008

    the stench from DC is overwhelming!

  • WRALblows Oct 7, 2008

    America's like a drug addict that needs to hit rock bottom before the addiction to debt is realized. We must admit our weakness before we can move forward. This whole problem is a result of people buying too many things they could not afford without the use of their credit score. And the feds argument is we need to do everything to enable lending again? That's like giving a heroine addict more smack to cure 'em. This is pathetic.

  • spamabyss Oct 7, 2008

    These recent bailouts are just a few drops in the bucket compared to the Social Security debt the government has incurred by raiding the Social Security "trust" fund. Get ready for the "you are on your own" speech after a lifetime of being robbed by this Ponzi scheme.