Bernanke warns of slowing economy

WASHINGTON -- Federal Reserve Chairman Ben Bernanke told Congress Thursday the economy is deteriorating and signaled a readiness to keep on lowering a key interest rate to shore things up.

Bernanke also told the Senate Banking Committee the one-two punch of housing and the credit crises has greatly strained the economy. And he forecast sluggish growth in the near term. Bernanke also noted hiring has slowed and people are likely to tighten their belts further because of high energy prices and plummeting home values.

"The outlook for the economy has worsened in recent months, and the downside risks to growth have increased," Bernanke said.

Bernanke told senators the "virtual shutdown" of the market for subprime mortgages given to people with blemished credit histories or low incomes -- and a reluctance by skittish lenders to make "jumbo" home loans exceeding $417,000 -- have aggravated problems in the housing market. Unsold homes have piled up and foreclosures have climbed to record highs.

"Further cuts in homebuilding and in related activities are likely," Bernanke cautioned.

Given all the dangers facing the economy, he said, the Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks." Bernanke indicated additional rate cuts were likely. Still, he voiced hope economic growth will improve later this year.

Bernanke and Treasury Secretary Henry Paulson don't believe the country will fall into a recession. Their forecasts still call for growth, albeit slow growth, they said. However, the pair did say Thursday the administration and the Fed are expected to downgrade their economic forecasts for this year.

Bernanke said his forecast is for the economy to continue to endure a "period of sluggish growth." That would be "followed by a somewhat stronger pace of growth starting later this year" as the effects of the Fed's rate cuts and a newly enacted stimulus package begin to be felt. The $168 billion package, which includes rebates for people and tax breaks for businesses, was speedily passed by Congress last week and signed into law Wednesday by President Bush.

Sen. Richard Shelby, a Republican from Alabama, was skeptical, saying he thought the energizing impact of rebates would be "negligible" and likened the action to "pouring a glass of water into the ocean."

Bernanke said it was "important to recognize that 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 will become even harder to secure.