Federal Reserve Chairman Ben Bernanke, in a signal he is open to cutting interest rates, said the latest bout of turbulence in financial markets may put more strain on the economy. The housing downturn and related mortgage turmoil are adding "greater than usual" uncertainty to the economic outlook, Mr. Bernanke said, in prepared remarks last night in Charlotte, N.C. "These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors."
Fed officials are increasingly paving the way for a rate cut at their Dec. 11 meeting, barring a significant improvement in either market conditions or economic data. To determine their next move, Mr. Bernanke said Fed policy makers would be closely watching a stream of data arriving in the next two weeks -- including readings due out today on personal income and spending and next week's report on the November job market.
"I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some head winds for the consumer in the months ahead," he said. He also reiterated worries that surging costs of food and energy, along with the weak dollar, could raise the public's inflation expectations and erode price stability. Inflation has remained relatively tame in recent months.
Mr. Bernanke's comments echoed remarks by Fed Vice Chairman Donald Kohn on Wednesday that led markets to conclude the Fed would cut interest rates to offset the risks posed by mortgage-related troubles in the credit market. Investors expect the Fed to cut interest rates by at least a quarter percentage point next month from the current 4.5%, and markets are putting the odds of a half-point cut at 50%. Further easing, especially putting a larger cut on the table, could draw opposition from some policy makers. But Fed officials are grappling with an economy struggling under the weight of tighter lending standards and a depressed housing market.
The Commerce Department said yesterday that new-home sales rose 1.7% in October, but the median price of a new home in October was down 13% from a year earlier, to $217,800. Many economists expect economic growth this quarter to come in below 1%, and some are forecasting a slight contraction. Underscoring the spreading weakness, new claims for unemployment insurance last week rose a seasonally adjusted 23,000, to 352,000 -- their highest level since February -- an indication the labor market is beginning to deteriorate. The four-week average of new claims, a more accurate gauge of the underlying trend, increased 5,750, to 335,250, the highest level since March, the Labor Department said.
Yesterday, the government raised its estimate of the economy's growth pace in the third quarter to an annualized 4.9%, a full percentage point above its previous estimate. But that did nothing to change assessments that growth is grinding nearly to a halt this quarter. The revision of the third quarter's gross-domestic-product growth, which was widely anticipated, reflects upward revisions in the tally of exports and inventories, which could portend production cutbacks. The third-quarter economy was "helped by the fact that the credit crunch was barely under way when the majority of this growth data was collected," said economist Rob Carnell of ING Bank. He said more-timely data "indicate a much broader weakening of the economy and also few signs of inflation outside food and energy."
The Commerce Department also reported a decline in a measure of corporate profits in the third quarter, with cash flow falling for the third quarter in a row. The Fed's favored inflation gauge -- the price index for personal-consumption expenditures other than food and energy -- was up an unrevised 1.8% in the third quarter from last year, higher than the second quarter's 1.4%, but within the comfort zone of some Fed officials.
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