Federal Reserve Chairman Ben Bernanke on Thursday held the door open to more interest rate cuts to help the struggling U.S. economy, but told Congress the central bank expects growth to pick up later in the year.
The Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside
risks," Bernanke told the Senate Banking Committee.
He acknowledged the outlook for the economy had worsened in recent months and said risks to growth had picked up. His comments reinforced investors' expectations the central bank would lower interest rates by a half-percentage point at its next meeting on March 18.
However, the central bank chairman also said he expects sluggish growth to give way to a somewhat stronger expansion in the second half of the year as the impact of fiscal and monetary stimulus now put in place is felt.
"Our policy stance must be determined in light of the medium-term forecast for real activity and inflation, as well as the risks to that forecast," he said.
The Fed has already lowered benchmark borrowing costs by 2.25 percentage points since mid-September, taking the overnight federal funds rate down to 3 percent.
Bernanke painted a somber picture of risks facing the economy, and U.S. stock prices and the dollar fell on his gloomy assessment.
Bernanke told lawmakers the Fed will lower its projections for U.S. growth in forecasts to be released next week, bringing
them closer into line with views in the private sector. In November, it had said the economy would likely expand 1.8 percent to 2.5 percent this year.
However, the latest comments from Bernanke reflected a slightly softer tone than remarks a month ago, when he said the Fed stood ready to take "substantive additional action" -- a signal of the sharp rate cuts that followed late in the month.
Like Bernanke, Treasury Secretary Henry Paulson said he saw the economy dodging a recession. "I believe that we are going to continue to grow, albeit at a slower rate, but risks are to the downside," he said.
Former U.S. Federal Reserve Chairman Alan Greenspan, however, said on Thursday that the country's economy was "clearly on the edge" of a recession. Arguing that house prices would continue to fall, he said: "Stagflation is too strong a term for what we are on the edge of."