In nearly three hours of testimony before the House Financial Services Committee, Federal Reserve Chairman Benjamin Bernanke told Congress that many of the challenges the economy faces stem from the contraction of the U.S. housing market and that the Fed stands ready to cut interest rates further.
Bernanke chose his words carefully, but left no doubt that the Fed was willing to make additional rate cuts.
"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 told Congress.
The Fed Chairman said that the downturn in the housing market will continue to weigh on economic activity in the coming quarters. Bernanke said home builders, still faced with abnormally high inventories of unsold homes are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and related industries.
Research group Global Insight is projecting that the downside risks to growth cited by the Fed chairman will become more pronounced as the first quarter progresses. Global Insight reports that activity in the services sector is contracting, and consumer confidence has slumped into recessionary territory. Momentum behind business equipment spending is fading rapidly, and payroll employment growth is expected to stall in the first quarter.
"The huge drag to growth from the negative dynamics in the housing market will become more apparent in the upcoming reports on real growth," said Brian Bethune, U.S. economist at Global Insight.
"These indicators point in the direction of a mild recession in the first half of 2008," Bethune concluded.
Based on the continued sluggishness of the economy, Global Insight forecasts that the Fed will reduce the federal funds rate by an additional 50 basis points on March 18 and another 25 to 50 basis points on April 30. If implemented, the two combined actions will take the federal funds rate close to 2 percent.