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Fed chief: downside risks become more pronounced
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US Federal Reserve Chairman Ben Bernanke warned Thursday that the downside risks to economic growth have grown more pronounced.


"Recently, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and that the downside risks to growth have become more pronounced," said Bernanke in testimony to the House Budget Committee.


In particular, a number of factors, including continuing increases in energy prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending this year, he said.


He said that consumer spending also depends importantly on the state of the labor market, as wages and salaries are the primary source of income for most households.


Government data showed that the unemployment rate rose 0.3 percentage point in December to 5.0 percent from 4.7 percent in November and private payroll employment declined, a showing Bernanke described as "disappointing."


The Fed chief said that the slowing in residential construction, which subtracted about one percentage point from the growth rate of real gross domestic product in the third quarter of 2007, likely curtailed growth even more in the fourth quarter, and it may continue to be a drag on growth for a good part of this year as well.


In the business sector, investment in equipment and software appears to have been sluggish in the fourth quarter, while nonresidential construction grew briskly.


In light of the softening in economic activity and the adverse developments in credit markets, Bernanke said, growth in both types of investment spending seems likely to slow in coming months.


Meanwhile, financial conditions continue to pose a downside risk to the outlook, he said, noting that the financial situation remains fragile and many funding markets remain impaired.


"Adverse economic or financial news thus has the potential to increase financial strains and to lead to further constraints on the supply of credit to households and businesses," the Fed chief said.


On the inflation front, Bernanke said that the public's expectations of future inflation thus far appear to have remained reasonably well anchored, and pressures on resource utilization have diminished a bit.


And futures markets suggest that food and energy prices will decelerate over the coming year.


"Given these factors, overall and core inflation should moderate this year and next, so long as the public's confidence in the Federal Reserve's commitment to price stability is unshaken," he said.


In his testimony, Bernanke also noted that economic activity in major U.S. trading partners has continued to expand vigorously.


"U.S. exports will likely continue to grow at a healthy pace incoming quarters, providing some impetus to the domestic economy," he noted.


Once again, Bernanke pledged to aggressively slash interest rates as needed to bolster the economy that is weakening under the strains of a severe housing slump and persistent credit crunch.


"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," Bernanke told the committee. He made similar remarks last week.


(Xinhua News Agency January 18, 2008)

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