The New York Times
July 16, 2008
Bernanke Is Pessimistic, but Bush Urges a ‘Deep Breath’
By STEVEN R. WEISMAN
WASHINGTON — Warning of the risks of a further slowdown and higher inflation, Ben S. Bernanke, chairman of the Federal Reserve, offered a gloomy assessment of the economy on Tuesday as President Bush, speaking a few blocks away, urged Americans to have faith in the country’s financial foundation.
In testimony before the Senate Banking Committee, Mr. Bernanke avoided the word “recession” in characterizing the current economy, noting instead that consumer spending and exports were keeping growth “at a sluggish pace” while the housing sector “continues to weaken.”
He added that spending for personal goods had “advanced at a modest pace so far this year, generally holding up somewhat better than might have been expected given the array of forces weighing on household finances and attitudes.”
While the risks to the overall economy were still “skewed to the downside,” he said, inflation “seems likely to move temporarily higher in the near term.”
Even as Mr. Bernanke fielded questions from senators, a different view of the economy emanated from the White House.
President Bush, speaking at a White House news conference that coincided with the Fed chair’s testimony, urged Americans to “take a deep breath.”
“My hope is — is that people take a deep breath and realize that their deposits are protected by our government,” the president said. He added that economic growth “was not the growth we’d like” but expressed confidence that the country would overcome “a time of uncertainty.” The nation’s troubled financial system is "basically sound," he added.
The president said that the economy and the pillars on which it rests were “basically sound.” And he dismissed questions about reports that wholesale prices rose 1.8 percent in June, the fastest 12-month inflation rate in more than a quarter century.
Mr. Bernanke’s mixed assessment of the economy appeared to signal that the Fed would not be lowering interest rates further in spite of the economic sluggishness, as it did earlier this year, out of concern that lower rates would spur more inflation. In June, the Fed declined to lower rates and instead suggested it might raise rates later in the year.
In his testimony, he was especially pessimistic about any easing of energy prices, dismissing suggestions that they were being driven by speculation in futures markets. Instead, he said high energy costs reflected the markets’ recognition that demand was outstripping supplies.
“Over the past several years, the world economy has expanded at its fastest pace in decades, leading to substantial increases in the demand for oil,” Mr. Bernanke said. “On the supply side, despite sharp increases in prices, the production of oil has risen only slightly in the past few years.”
President Bush’s remarks, and Mr. Bernanke’s testimony, came at an unusually turbulent time in financial markets, since it followed on the heels of the Fed’s announcement that it would temporarily open its discount window to the two troubled mortgage giants, Fannie Mae and Freddie Mac.
The actions to stabilize Fannie and Freddie occurred over the weekend as the Treasury secretary, Henry M. Paulson Jr., also called for Congress to approve emergency legislation giving the federal government power to inject billions of federal funds through investments and loans.
The actions announced Sunday echoed similar actions in mid-March, when the Fed moved to avert a financial collapse of the investment bank Bear Stearns by offering an emergency loan to facilitate its sale to JPMorgan Chase. At the same time, the Fed set up emergency lending facilities for major investment banks hit by the credit crunch.
“These steps to address liquidity pressures coupled with monetary easing seem to have been helpful in mitigating some market strains,” Mr. Bernanke said. But despite the “positive effects” of the Fed’s actions, he said that the problems of unstable markets continued because of “declining house prices, a softening labor market and rising prices of oil, food and some other commodities.”
After Mr. Bernanke’s testimony, Mr. Paulson and the chairman of the Securities and Exchange Commission, Christopher Cox, took center stage.
In prepared remarks, Mr. Paulson focused on the government’s efforts to assist Fannie Mae and Freddie Mac, complementing comments earlier by Mr. Bush, who urged Congress to pass housing legislation that would modernize federal regulatory procedures while stabilizing the two companies.
Continued confidence in the two companies “is important to maintaining financial system and market stability,” Mr. Paulson said. While lawmakers have said that they would attach the bailout plan to housing legislation, the timing was uncertain.
Representative Barney Frank, Democrat of Massachusetts and the chairman of the House Financial Services Committee, said Monday that a bill could be sent to President Bush by week’s end. But on Tuesday, Congressional Democrats said it would take at least until early next week for the House to act, citing resistance among some Republicans to the administration’s rescue plan for Fannie and Freddie.
In his testimony Tuesday, Mr. Paulson said Fannie and Freddie “are central to the availability of housing finance, which will determine the pace at which we emerge from this housing correction.”
“Our plan is aimed at supporting the stability of financial markets,” he said, “not just these two enterprises. This is consistent with Treasury’s mission to promote the market stability, orderliness and liquidity necessary to support our economy.”
David Stout contributed reporting.
Copyright 2008 The New York Times Company