Federal Reserve Worried About Economic Growth

Federal Reserve chairman Ben Bernanke warned congress on Thursday that the central bank is keeping a close eye on the subprime mortgage crisis and the recent spike in oil prices. He also stated that higher inflation and weaker economic growth could be in store. The Fed expects growth to slow noticeably in the forth quarter this year as the weakened financial sector spreads through the economy. Bernanke did downplay fears of a recession by stating that the central bank expects the economy to grow next year, although it should be at a slower pace than we’ve experienced this year so far.

Bernanke did stress that inflation will be a problem with high energy prices, and that this has put further restraint on economic activity. Wall Street still interpreted Bernanke’s comments today as a sign that the Federal Reserve may now be more likely to cut a key short-term interest rate at its next meeting on December 11th. According to futures listed on the Chicago Board of Trade, investors as of late Thursday were pricing in an 88 percent chance that the Federal Reserve will lower the federal funds rate by a quarter of a point to 4.25 percent in December. This is because the Federal Reserve is very driven by the numbers that are released to them for the meeting. If the economy is doing poorly and they expect it to continue they will lower rates. While Bernanke did stress that inflation will be a problem due to the higher oil prices, the credit crisis will not presently allow him to raise rates to combat this.

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