Economic Outlook Worsens, Policy Makers Remain Optimistic

Posted on February 20, 2008 by LCT Staff - Also by this author - About the author

WASHINGTON, D.C. — With the credit markets once again deteriorating, the nation’s two top economic policy makers acknowledged late last week that the outlook for the economy had worsened, as both came under criticism for being overtaken by events and failing to act boldly enough.

In testimony to Congress, Ben Bernanke, the chairman of the Federal Reserve, signaled that the Fed was ready to reduce interest rates yet again, pointing out that problems in housing and mortgage-related markets had spread more widely and proved more intractable than he predicted three months ago.

His sobering assessment was echoed by Treasury Secretary Henry Paulson Jr., who appeared with him. Both continued to avoid predicting a recession but said they were scaling back the more optimistic forecasts they had issued in November.

Stock prices, which normally rally when the Fed hints it will lower borrowing costs, tumbled instead. The Dow Jones industrial average dropped 175 points, or 1.4 percent; broader stock indexes dropped by similar amounts.

Anxiety is escalating among institutional lenders and major borrowers, as the panic over soaring default rates on subprime mortgages that began last summer continues to spread, freezing up credit for municipalities, hospitals, student loans and even investment funds holding the most conservative bonds.

Testifying before the committee, Mr. Bernanke said he still expected the economy to grow at a “sluggish” pace over the next few months and to pick up speed later in the year. But he said “the downside risks to growth have increased,” noting that spiraling losses in home mortgages have dragged down the credit markets and shaken the broader economy.

Many Wall Street economic forecasters, however, 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. . Bernanke said the economy would grow slowly but pick up speed later in response to both the Fed’s lower interest rates and the $168 billion economic stimulus package that President Bush signed last week.

SOURCE: New York Times

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