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Wednesday, July 16, 2008

Fed Chief Bleak on Economic Outlook

Published: July 16, 2008

WASHINGTON — A sense of economic gloom gripped Washington on Tuesday as President Bush urged Americans not to lose faith, the Federal Reserve chairman offered a mostly bleak assessment of the difficulties ahead for the economy, and the administration’s latest effort to help the housing sector faced tough questioning in Congress.

Brendan Smialowski for The New York Times

Henry M. Paulson Jr., left, the Treasury secretary, on Tuesday with Christopher Cox, center, the S.E.C. chairman, and Ben Bernanke, the Fed chief.

Evan Vucci/Associated Press

President Bush tried to reassure Americans on Tuesday.

Despite widespread concern about losses suffered by Fannie Mae and Freddie Mac, the two giant housing finance companies, the Bush administration’s call for quick passage of legislation to authorize the use of government funds to save them ran into heavy fire, especially among some Republicans concerned about taxpayer liability.

The opposition threatened to slow down the rescue plan, especially if lawmakers insist on making major changes to the package, which would allow the Bush administration to use the United States Treasury to help Fannie and Freddie by lending them money and buying their stock.

The latest trouble in the financial markets, rising energy prices and spreading joblessness were also sowing new discord among lawmakers, with Democrats calling for, and Republicans resisting, a new round of spending programs and tax cuts to stimulate the economy.

A day after reports of losses by regional banks, causing some depositors to pull their money out, Mr. Bush held an unscheduled news conference at which he felt compelled to remind Americans that their deposits were insured up to $100,000.

“My hope is that people take a deep breath and realize that their deposits are protected by our government,” the president said. He added that economic growth “was not the growth we’d like” but expressed confidence that the country would overcome “a time of uncertainty.” The nation’s troubled financial system is “basically sound,” he added.

Reacting to the latest dismal news, the Dow Jones industrial average closed down almost 93 points after a roller-coaster session, with the shares of the two mortgage finance companies continuing their steep slide. Fannie Mae fell 27 percent and Freddie Mac, 26 percent.

The Fed chairman, Ben S. Bernanke, testifying before the Senate Banking Committee, avoided the word “recession” but presented a generally gloomy picture, saying that consumer spending and exports were keeping growth “at a sluggish pace” while the housing sector “continues to weaken.”

“The economy has continued to expand, but at a subdued pace,” Mr. Bernanke said at another point. In one rare note of optimism, he revised upward the Fed’s growth estimate for the year and added that consumer spending had somewhat exceeded expectations.

The Fed chief spent the early morning testifying alone, as part of his twice-a-year appearances before Congress, and then joined Treasury Secretary Henry M. Paulson Jr. and Christopher Cox, chairman of the Securities and Exchange Commission. Sitting with them, he endorsed Mr. Paulson’s plan, unveiled on Sunday, to seek legislation to give the federal government temporary power to help Fannie and Freddie, and he also defended the Fed’s opening its own lending facility to the two agencies.

Mr. Bernanke offered no timetable for improved economic performance, declaring that while the risks to the overall economy were still “skewed to the downside,” inflation “seems likely to move temporarily higher in the near term.” The Fed, he said, needed to guard against higher prices’ spreading through the economy.

That mixed warning about rising costs and a downturn reinforced the message of last month’s meeting of the Federal Open Market Committee, the central bank’s policy-making body, that it would not cut interest rates further and, indeed, that higher rates might be necessary to combat inflation.

Despite snaking around branches of IndyMac Bank and a report from the chairwoman of the Federal Deposit Insurance Corporation that more banks were expected to run into trouble, Mr. Bernanke said he did not think there was a significant danger to the banking sector, most of which he said remained profitable.

“Of course, all banks are being challenged by credit conditions now,” the Fed chief said in response to a question from Senator Richard C. Shelby, an Alabama Republican on the banking panel. “The good news is that the banking system did come into this episode extremely well capitalized, extremely profitable.”

But concerns that consumer banking could succumb to the ills of the credit crisis clearly rattled official Washington, as Mr. Bush’s citation of the federal government’s insurance of bank deposits made clear.

“The bottom line is this: We’re going through a tough time,” Mr. Bush said. “But our economy’s continued growing, consumers are spending, businesses are investing, exports continue increasing and American productivity remains strong.”

Reporting was contributed by Steven Lee Myers, Stephen Labaton and David M. Herszenhorn in Washington, and Michael M. Grynbaum in New York.

Source: http://www.nytimes.com/2008/07/16/business/economy/16econ.html?_r=1&th&emc=th&oref=slogin