US economy spirals down; Fed chief signals further rate cuts

With fears rising that the economy is sliding into recession, Bernanke’s blunt assessment is expected to encourage politicians to call on Congress to take steps that would stimulate growth beyond what the Fed can achieve through lower interest rates.

Many analysts now expect the Fed to continue cutting, to 3 per cent or even lower by summer, to prevent — or at least mitigate — a recession. The goal would be to get people to borrow and spend more.

Consumer spending, however, may already have hit a wall. The nation’s biggest retailers announced that holiday sales gains were the weakest in the last five years, only Wal-Mart gained ground, after it slashed prices to draw jittery consumers.

“Bernanke should have made this commitment to cut rates aggressively two or three months ago,” said Mark Zandi, chief economist at Moody’sEconomy. com “Will it be enough? It will be close.”

The mounting evidence has suggested to a growing number of economists and politicians that the Fed by itself cannot stem the economic slide and that Congress must help with fiscal policy in the form of a tax rebate for low-income families, extended unemployment insurance or some other subsidy.

The Fed, Bernanke said, had counted on an expanding job market to “support moderate growth” in consumer spending. But the Government reported Friday that hiring had fallen almost to zero in December and the unemployment rate had jumped to 5 percent from 4.7 percent — a rare one-month surge that almost always indicates coming hard times.

“It would be a mistake to read too much into any one report,” Bernanke said of the jobs report. “However, should the labour market deteriorate, the risks to consumer spending would rise.”

Bernanke said the Fed had successfully pumped money to banks and other lenders damaged in the mortgage crisis. Lending to banks directly from the Fed’s discount window, he said, had not worked as well as auctioning fixed multibillion-dollar sums.

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