Thursday, November 8, 2007

Bernanke says US economy to slow

Federal Reserve chief Ben Bernanke has warned that the US economy will slow noticeably before the end of the year.

He blamed the slowdown on the credit crisis, which has made it harder for banks and individuals to borrow money.

He said that there was likely to be more "financial restraint on economic growth as credit becomes more expensive and difficult to obtain".

In the longer term, he said that the greater premium attached to risk may lead to a healthier financial system.

"Investors have also become more cautious and are demanding greater compensation for bearing risk," he said.


Bernanke is in a box and it is getting smaller
Christopher Low, FTN Financial

The credit crisis, caused by an abundance of debt of questionable value, has made banks more reluctant to lend money.

Mr Bernanke acknowledged that this was causing particular problems to homeowners who wanted to refinance their mortgages to offset the end of special offer rates.

'Sluggish growth'

Some analysts say that the comments make it more likely that there will be another interest rate cut before the end of the year.

"In particular, it's his comment that the FOMC (the rate-setting committee) expects growth to slow noticeably in the fourth quarter and expects sluggish growth in early 2008," said Dustin Reid from ABN Amro in Chicago.

"It's perhaps a warning that the Fed may be looking to downgrade its growth outlook," he added.

But others say that it is just confirmation of how bad the outlook is for the economy.

"They are worried about the economy. They are worried about inflation," said Christopher Low at FTN Financial in New York.

"Bernanke is in a box and it is getting smaller," he added.

Mr Bernanke was addressing the Congress' Joint Economic Committee.

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