Bernanke, Paulson see US avoiding recession

Bernanke, Paulson see US avoiding recession

Hemant P. Maradia / Mumbai

The two US policy makers say the outlook for the US economy is worse than it was a few months ago and both expect cuts in official growth forecasts

Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson on Thursday exuded confidence that the US will avoid falling into recession on the back of aggressive rate cuts and the US$170bn stimulus package. The two made their comments at a hearing before the Senate Banking Committee about the state of the economy. However, Bernanke reiterated that the outlook for the world's largest economy had worsened amid the ongoing turmoil in the housing and credit markets. Paulson too acknowledged the growing problems in the US economy. The two leading US economic policy makers said that the outlook for the US economy was worse than it was as recently as a few months ago, and both expect cuts in official growth forecasts in the coming months. The Fed is currently predicting 1.8% growth for this year. Bernanke said a new forecast would be finalized next week. The Council of Economic Advisors' most recent estimate pegs the US economic growth at 2.7% in 2008. "The Federal Open Market Committee 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," Bernanke said. The Fed has done a lot to stave off a recession but stands ready to do more if the outlook darkens, he said. The Fed economists will be burning the midnight oil to gauge if the rate cuts undertaken so far are having their intended effects, Bernanke said. Bernanke painted an improving picture for the US economy, saying that he expects a stronger pace of expansion starting later this year after an unspecified period of sluggish growth. At the same time he repeated the warning about more downside risks. "Although the baseline outlook envisions an improving picture, it is important to recognize the 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," Bernanke said. The Fed chief also said that he believes major banks and Wall Street firms are likely to take more hits due to bad investments in subprime mortgages. That could lead to tighter lending standards and contribute to an overall slowdown, Bernanke said. "More expensive and less available credit seems likely to continue to be a source of restraint on economic growth," Bernanke said While some of the Senate panel members praised Bernanke and Paulson for the steps taken so far to boost the US economy, a few others criticised the duo for their lax oversight and lack of early response to the downturn in housing. Paulson, a former CEO of Goldman Sachs said that he also spoke regularly with top Wall Street executives, adding that some are more worried than others. The two were also asked to explain why investments in many major banks and Wall Street firms by sovereign wealth funds should not be a concern. Paulson said these investments are an important endorsement of the US financial system and that they do not pose a risk of foreign governments having undue influence on major banks here. "I think we need to be vigilant. I don't think we need to be fearful," Paulson said. Meanwhile, many Wall Street economists are already estimating that the risks of a recession are at least 50-50, and a growing number of analysts contend that an economic contraction may have already begun. Former Fed chairman Alan Greenspan said that the US economy is on the verge of its first recession in six years as falling home values hurt consumer spending. "We are clearly on the edge," Greenspan told a group of energy-industry executives yesterday at the Cambridge Energy Research Associates' 27th annual CERAWeek conference in Houston. He reiterated comments from last month that the odds of an economic contraction are 50% or better.