NEW YORK—Federal Reserve chief Ben Bernanke on Thursday said the outlook for growth was sluggish at best, even as the government reported record exports trimmed the U.S. trade deficit last year, suggesting the economy at the end of 2007 was not as weak as earlier thought.
Bernanke told the Senate Banking Committee the economic outlook had worsened in recent months and risks to growth had picked up, indicating the Fed's aggressive interest rate cuts since late last year had yet to work their magic.
The Fed chief's assessment took some of the shine off news that the U.S. trade deficit with the rest of the world narrowed 6.2 percent to total $711.6 billion in 2007, down from the record set in 2006. It was the largest annual percentage drop since 1991.
A smaller trade gap for the month of December may prompt economists to raise their estimates of 2007 fourth-quarter U.S. growth. A separate report showed claims for jobless benefits fell last week, but remained somewhat elevated.
Bernanke's assessment indicated the economy still had to work through a soft patch before improving later this year and left intact market expectations for more monetary easing when the Fed meets to set interest rates next month.
"Bernanke's comments were in line with his recent rhetoric—the focus on the downside risk to economy—and the Fed is going to cut rates again," said Ken Landon, global foreign exchange strategist at JP Morgan Chase in New York.
"His comment on growth later in the year is a bit tentative. We do expect growth to pick up because of the rate cuts and there is usually a nine-month lag. But I don't think that will hold him back from cutting rates further."
According to the government's initial estimate, the economy grew by 0.6 percent in the fourth quarter of 2007. That figure is subject to further revisions by the government.
Market Reaction
Futures markets have fully factored in the likelihood that the Fed at its March policy meeting will cut its benchmark overnight federal funds target rate by half a percentage point to 2.50 percent.
On Wall Street, stocks were lower on the day, while the dollar also dipped.
However, U.S. government bonds, which generally perform better during times of economic weakness, headed lower in price.
A strong global economy and a weakening dollar have propelled U.S. exports to new highs, which helped the world's largest economy narrow its annual trade deficit last year for the first time in six years.
U.S. exports of goods and services set a record in December, pushing the total for the year to a record $1.62 trillion, and are a key source of support to an economy expected to struggle in other areas during the first half of this year.
Bernanke said further cuts in home-building and related activities are likely, and said a softer jobs market, higher energy prices and falling home values could be expected to weigh on consumer spending in the near term.
Bernanke said the Fed will soon revise its growth outlook for 2008 to be "reasonably consistent" with estimates from private forecasters.
In November the Fed had forecast 2008 growth at 1.8 percent to 2.5 percent. This week, however, the Blue Chip Economic Forecast panel of economists projected 2008 growth of 1.7 percent, down from a prior forecast of 2.2 percent.
Inflation Focus
Bernanke also noted inflation had moved up as a result of soaring prices for oil and food, as well as the weaker dollar, adding that risks of price growth bear close watching.
In fact, without high oil prices, the annual U.S. trade deficit might have diminished further. The petroleum deficit accounted for more than 40 percent of the total deficit in 2007 and hit a record $293.5 billion.
Overall imports set a record for the year at $2.33 trillion. The United States also imported a record $331.2 billion worth of oil in 2007.
On the job front, the number of U.S. workers filing new claims for jobless benefits fell 9,000 last week, although the four-week moving average of new claims, which is considered a more reliable gauge, rose to its highest since Oct. 22, 2005, which was in the aftermath of Hurricane Katrina.
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