When it comes to turning around the troubled economy, many people have confidence Ben Bernanke and his Federal Reserve colleagues can get the job done.
It must be a dose of somewhat heartening news for a Fed operating in crisis mode.
In his two years as Fed chairman, Bernanke is now confronted by his biggest challenge: housing and credit debacles that threaten to push the economy into its first recession since 2001, if they haven’t already.
How well Bernanke, a scholar of the Great Depression, handles these crises will shape his effectiveness, his credibility and his legacy at the central bank.
Fifty-five percent of the people surveyed in an Associated Press-Ipsos poll said they have a “great deal” or “some” confidence in the Fed to turn things around. Forty-one percent said that about Congress and only 28 percent said that about President Bush.
Yet the Fed only can do so much.
“Right now the Fed is looked at as the superhero to help the economy, but unfortunately there is a lot of kryptonite out there. The Fed’s powers are limited,” said Richard Yamarone, economist at Argus Research.
Appearing before the Senate Banking, Housing and Urban Affairs Committee, Bernanke said Thursday the economy is deteriorating and he signaled the Fed was prepared to continue lowering a key interest rate to brace the teetering economy.
The Fed “will act in a timely matter as needed to support growth and to provide adequate insurance against downside risks,” he said.
The Fed started cutting that interest rate in September. The rate reductions have turned much more aggressive recently. Over just eight day in January, the Fed lowered rates by 1.25 percentage points — the biggest one-month cut in a quarter-century.
Economists expect an additional reduction in March and perhaps in April.
The Fed’s hope is that lower borrowing costs will induce people to buy more, helping stabilize the wobbly economy.
But recent reports by Wal-Mart and other major retailers suggest that people are spending cautiously. Many are watching their biggest asset — their home — slump in value. High energy and food prices are factors, too; some people already are struggling with stacks of bills.
The Fed’s rate cuts also will not prevent more losses from financial companies that invested in complex mortgage securities that turned sour, at a loss of billions of dollars.
Interest rate relief will not produce a quick turnaround for the depressed housing market. Unsold homes have piled up. Home foreclosures are at record highs. Harder-to-get credit has made if more difficult, if not impossible, for some people even to buy homes.
“The most important thing we can do right now is to restore that consumer and investor confidence, which is absolutely critical if we’re going to get back on our feet again,” the Senate committee chairman, Christopher Dodd, told Bernanke.
The Connecticut Democrat commended the Fed chief “for taking an active role in addressing the weakness in our economy.”
Other lawmakers and Wall Street investors, however, have faulted Bernanke for not cutting rates sooner.
The poll, conducted Feb. 4-6, found that 61 percent of those questioned believe the country is now in a recession. The survey involved telephone interviews with 1,006 adults and had a margin of sampling error of plus or minus 3.1 percentage points.
The Fed can lower rates only so far — in theory to zero. So it must be careful to cut rate wisely. The Fed’s key rate now stands at 3 percent.
Bernanke is not forecasting a recession and told senators the economy will suffer through a “period of sluggish growth.” He said that would be “followed by a somewhat stronger pace of growth starting later this year” as the effects of the rate cuts and the recent $168 billion economic aid plan begin to be felt.
There are risks, too, in lowering rates to help bolster economic growth. One is the possibility that approach could aggravate inflation.
Bernanke, in a congressional appearance last month, acknowledged that the Fed is not dealing with a garden-variety economic slowdown.
“There are a number of characteristics of this period that are somewhat unique, including the financial market turmoil we’ve seen, pressures on banks,” he said as he came out in support of the aid plan.
“We are hit on the other side by these rapid increases in oil and commodity prices ... which create some inflation risks. ... The housing sector, of course, has been in a very sharp contraction, and relatively unusual pattern that we’ve seen there as well,” Bernanke said. “So there really is a confluence of different events that makes this a difficult accommodation of circumstances.”
During a time of crisis, it is important for the Fed to try to speak with one voice, and not send mixed or confusing messages to Wall Street investors, consumers and businesses, some Fed watchers said.
Bernanke, who spent most of his professional life in academia and led the economics department at Princeton University, has sought to make the Fed more open.
“As dean you let everybody have their say. But it is not something to do now,” said Terry Connelly, dean of Golden Gate University’s Ageno School of Business. “We need a little more Supreme Court discretion and less faculty-room democracy,” he said.
For instance, Connelly pointed to speech last week by Charles Plosser, president of the Federal Reserve Bank of Philadelphia. Plosser talked in part about the importance of the Fed not turning a blind eye to inflation matters even as it battles economic weakness. The remark chilled Wall Street, sending stocks lower.
Sen. Jim Bunning, R-Ky., offered Bernanke some advice on Thursday.
“I just want to give you a heads-up. When you see something coming, don’t put it off as the chairman of the Fed. Take action immediately, because this housing market (slump) has been coming to us for a year — a year and a half — and we didn’t react properly to it,” Bunning said.