Bernanke: Housing Woes to Slow Growth

By JEANNINE AVERSA
The Associated Press
Monday, October 15, 2007; 8:53 PM

WASHINGTON -- A deepening housing slump probably will be a "significant drag" on economic growth into next year and it will take time for Wall Street to fully recover from a painful credit crisis, Federal Reserve Chairman Ben Bernanke warned Monday.

Bernanke once again pledged to "act as needed" to help financial markets _ which have suffered through several months of turbulence _ function smoothly and to keep the economy and inflation on an even keel.

"Conditions in financial markets have shown some improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks," Bernanke said in a speech to the New York Economic Club. A copy of his remarks was made available in Washington.

It was Bernanke's most extensive assessment of the country's current economic situation since the August turmoil unhinged Wall Street.

The ultimate implications of the credit crunch on the broader economy, however, remain "uncertain," the Fed chief said.

Against that backdrop, Bernanke said the central bank will be closely watching the economy's vital signs in determining the Fed's next move. He didn't specifically commit to cutting rates again, but rather kept his options open.

Economists have mixed opinions on whether the Fed will lower interest rates at their next meeting, Oct. 30-31. Some insist the odds are lessening that the Fed will need to slice rates; Others, however, think rates will move lower.

"The Fed appears to be in watch mode at the present time," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group.

To help cushion the economy from the ill effects of the credit crunch and housing slump, the Fed on Sept. 18 slashed a key short-term interest rate by one-half percentage point to 4.75 percent. It marked the first rate cut in more than four years. It also reflected the most aggressive action taken by the Fed to curb fallout from the credit crisis, which intensified in August.

Since that September meeting, the housing slump _ the worst in 16 years _ has gotten deeper, Bernanke said.

"The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year," he said.

"However, it remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions," he added.


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