WASHINGTON — The economy is likely to improve in the second half of the year after a slow start, Federal Reserve Chairman Ben Bernanke said Thursday.
But he also signaled that the central bank is open to further interest-rate cuts because of the risk that the situation will get worse.
Bernanke, in testimony to the Senate Banking Committee, was trying to strike a tricky balance. He and Treasury Secretary Henry Paulson each aimed to show they were responding aggressively to risks to the financial markets and the economy, while not indicating a sense of panic that might make the situation worse.
“My baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus kick in,” Bernanke said.
He added that risks remain, including that the housing market or job market could get even worse than he forecasts, or that credit conditions could tighten further.
That reserved tone, and relative optimism about the economy, appeared to annoy Democrats and some Republicans on the committee, who suggested that Bernanke and Paulson are responding too timidly to the economic slowdown and mortgage crisis.
“The administration, including the agencies represented here this morning,” said Banking Committee Chairman Christopher Dodd, D-Conn., “need to do more. … Much more.”
Even as he projected that the economy will continue to grow this year, if slowly, Bernanke gave several clues that the Fed is inclined to cut interest rates beyond the 2.25 percentage points it has reduced a key short-term interest rate since September. And he indicated that he expects inflation to moderate.
“He wants the market to be aware that while the Fed is worried and will continue to ease, it’s not an open-ended commitment,” said Bruce Kasman, chief economist of J.P. Morgan. “It’s saying we are worried about downside risks, but we’ve also done a lot already.”
There was some evidence Thursday that the nation’s export sector is becoming a source of strength, as the trade deficit fell to $58.8 billion in December, from $63.1 billion in November.
Bernanke and Paulson stressed that the economy’s problems are different from those in the subprime-mortgage market, in that the underlying quality of the debt remains strong.
“With respect to municipal bonds and student loans, the good news is that the underlying quality of those credits is generally very good,” Bernanke said.
