Fed Will Act as Needed to Combat Risks: Bernanke

WASHINGTON (Reuters) – Federal Reserve Chairman Ben Bernanke toldCongress on Thursday the central bank will act as needed to help thestruggling U.S. economy, but it has to be mindful that growth shouldpick up later in the year.

The Fed "will be carefully evaluating incoming information bearingon the economic outlook and will act in a timely manner as needed tosupport growth and to provide adequate insurance against downsiderisks," Bernanke told the Senate Banking Committee.

He said the outlook for the economy had worsened in recent months and risks to growth had picked up.

However, the central bank chairman also said he expects sluggishgrowth to give way to a somewhat stronger expansion later this year andthe likely effects of fiscal and monetary stimulus now put in place hadto be considered in determining the appropriate level of interest rates.

"Our policy stance must be determined in light of the medium-termforecast for real activity and inflation, as well as the risks to thatforecast," he said.

Bernanke painted a somber picture of risks facing the economy andfinancial markets saw his comments as keeping the door open to moreinterest rate cuts from the Fed, which has already lowered benchmarkborrowing costs by 2.25 percentage points since mid-September. Thefederal funds rate now stands at 3 percent.

U.S. short-term interest rate futures prices pared losses to imply a20 percent chance the central bank will drop rates by three-quarters ofa percentage point in March, up from 6 percent earlier. A half-pointcut is fully expected.

"Policy-makers are clearly ready to provide further monetary easingto support growth," said Steve Malyon, a currency strategist for ScotiaCapital in Toronto.

Stock prices stayed moderately lower and government bond prices weresteady at lower levels, but the dollar dipped against the euro and theyen.

WEIGHT ON CONSUMER SPENDING

Bernanke predicted a further drop in home building and relatedactivities was likely, and said a softer jobs market, higher energyprices and falling home values could be expected to weigh on consumerspending in the near term.

At the same time, he noted that inflation had moved up as a resultof soaring prices for oil and food and the weaker dollar, adding thatinflation risks bear close watching.

"To date, inflation expectations appear to have remained reasonablywell anchored, but any tendency of inflation expectations to becomeunmoored or for the Fed’s inflation-fighting credibility to be erodedcould greatly complicate the task of sustaining price stability andreduce the central bank’s flexibility to counter shortfalls in growthin the future," he said.

Bernanke’s appearance before Congress, flanked by Treasury SecretaryHenry Paulson and Securities and Exchange Commission ChairmanChristopher Cox, comes at a time of turmoil.

U.S. economic growth slowed to a meager 0.6 percent annual rate inthe fourth quarter of 2007, house prices have been falling, and inJanuary the job market shrank for the first time in 53 months.

Large financial institutions have reported substantial losses frominvestments tainted by delinquent mortgages, and banks’ withdrawal fromlending has amplified the slowdown.

The White House and Congress put together a $168 billion fiscalstimulus plan, which was signed into law by President George W. Bush onWednesday. The plan offers tax rebates to households and incentives forbusinesses to invest.

(Additional reporting by Glenn Somerville; Editing by Neil Stempleman)

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