Bernanke Gives Economic Outlook

July 23, 2008 - Federal Reserve Chairman Ben Bernanke gave his semi-annual testimony before the House Financial Services Committee recently and it appears that he, along with a number of economists, hold out limited hope of a rebound of the U.S. economy in the second half of the year.  The next meeting of the Fed’s Federal Open Market Committee (or FOMC) is on August 5th in Washington where analysts expect the Fed Funds rate to stand pat at 2.00%, having fallen seven times since September of last year, as the Fed is now caught in a catch-22 situation of slower growth and rising prices.  

Forecasts for future growth remain more uncertain than usual as the risk that gross domestic product (or GDP) will shrink has been rising at a time the rate of inflation continues spiking.  Many economists anticipate an anemic growth rate of around 1% while others believe that the economy will actually contract rather than grow as a consequence of the decline in housing and its adverse impact on consumer spending which has been further aggravated by the spike in fuel prices as well as other inflationary pressures.  The annual rate of economic growth for the economy in the first quarter came in at 1%, reflecting the weakest six month period in five years.  The mounting financial crisis is curtailing the supply of credit and contributing to the slump in housing while an almost doubling of the price of oil this past year has forced consumer expectations of inflation higher.  U.S. households now anticipate that the average rate of inflation over the next five years will reach 3.4%, marking the highest expectation level since 1995.  The drop in home prices has contributed to the increasing rate of foreclosures, while both rising energy prices as well as more restrictive access to credit have all worked together to weaken the economy, moving it closer to recession.  The inflationary pressures coming from fuel, food and a variety of other commodities are now thought to be exerting pressure on wages and prices.  Tax rebates came at an opportune time for U.S. households and may have prevented even more lackluster consumer spending.  Both consumer and business spending are anticipated to be even more anemic over the second half of the year as more reasons to exercise caution will persist.  

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