Bernanke sees no end soon to U.S. expansion
But the Fed chairman said the markets went too far last week in reacting to his words.
WASHINGTON - Federal Reserve Chairman Ben S. Bernanke rejected the notion recently raised by his predecessor, Alan Greenspan, that the nation's economic expansion could be in danger of fizzling out.
But the good news for investors stopped there.
Bernanke said in testimony on Capitol Hill yesterday that Wall Street jumped too far last week when it interpreted a statement from Fed policymakers as signaling that they may soon cut interest rates.
Stock prices soared last week based on that view, and they fell sharply yesterday after Bernanke's caveat.
The Fed chief testified amid growing concern that problems with risky mortgages and a painful housing slump could send the economy into a tailspin. Greenspan, who left the Fed last year, recently said there was a one-in-three possibility of a recession this year.
In remarks that contributed to a gut-wrenching 416-point plunge in the Dow Jones industrial average Feb. 27, Greenspan suggested that the expansion, now in its sixth year, could be in danger of petering out.
Bernanke, while acknowledging there were risks, told Congress' Joint Economic Committee that the Fed did not see negative forces pushing the economy into a recession.
"There seems to be a sense that expansions die of old age, that, after they reach a certain point, then they naturally begin to end," Bernanke said. "I don't think the evidence really supports that. If we look at history, we see that the periods of expansions have varied considerably. Some have been quite long."
He acknowledged that last week the Federal Reserve changed its policy statement, which investors look to for clues about future rate moves. But he said the Fed's goal was not necessarily to forecast a cut in interest rates, but rather to give the policymakers "a bit more flexibility, given the uncertainties that we are facing and the risks that are occurring on both sides of our outlook."
There is an increased threat of higher inflation on the one hand and weaker-than-expected economic growth on the other, Bernanke said. Those economic crosscurrents can complicate the Fed's job.
When the Fed left its key interest rate unchanged at 5.25 percent last week, it dropped language contained in previous policy statements that had spoken only of the possibility of rate increases down the road. Wall Street interpreted that as suggesting the possibility of a rate cut.
The direction of rates hinges on what incoming barometers say about the economy and inflation, Bernanke said yesterday, echoing a point also made by his central bank colleagues last week.
Still, he said the Fed's predominant concern continued to be inflation. The Fed typically raises rates if it believes inflation is too high.
Bernanke said the growing troubles in the market for risky mortgages do not appear to be spreading to the overall economy.
"At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained," he said.
"Subprime" lenders who make home loans to people with blemished credit histories or low incomes have been battered. Weak home prices and rising interest rates have made it increasingly difficult for borrowers to keep up with their payments, pushing up the rate of delinquencies and foreclosures.