GLOOM & DOOM
Federal Reserve chief Ben Bernanke fumbled his first attempt yesterday to steer the economy away from a new credit wreck blocking the road ahead – and even managed to slam into the road sign warnings, sending stocks and the dollar plummeting.
Bernanke told Congress that the mortgage meltdown could spread into the healthy loan business and “could get worse before it gets better.” He also warned that soaring oil prices could become a cocked gun to the heads of overextended consumers.
Most troubling to investors was Bernanke’s fear that a string of economic downers now underway could converge into a full-blown lending crisis that could dry up loans for businesses and consumers alike.
Just minutes after Bernanke testified to the House Financial Services Committee, the Dow Jones industrial average began a steep nose dive to wipe out 148 points before lunchtime.
“Not too many people are opening the champagne. They’re worried because it feels like something big is going to break at any moment,” said Dixon Fung, currency strategist with MG Financial.
Although Bernanke tried to hedge his grimness with familiar “on-the-other-hand” refrains, it didn’t stop the rout’s momentum.
Toward the end of the session after traders had digested all of his remarks – including his public support to protect equity funds against any doubling of their taxes by Congress – stock prices recovered, with the Dow closing at 13,918.22, off 53.33. Oil company stocks shot up at the close to rescue the Dow. Other stock indexes were flat.
Bernanke had said oil prices were likely to stabilize in the past, but after his comments yesterday, crude shot up $1.03 to $75.05 a barrel causing the late rally in the oil stocks. Gasoline is 30 percent higher at the gas pumps than a year ago.
Some investors said they were appalled that Bernanke dodged one of the most pressing questions asked by Congress – his outlook on the dollar.
“When they asked him about the dollar, he said, ‘I don’t comment on the dollar. . .’ that he isn’t allowed to talk about it,” said portfolio chief Peter Schiff of Euro-Pacific Capital.”
“The dollar’s at its lowest levels in nearly 30 years and he’s not allowed to talk about it? That’s absurd. It’s vital to inflation and monetary policy.”
The dollar is at a 26-year low against the British pound at $2.054, and Australia’s dollar hit an 18-year high of $0.8789.
The Fed also slashed its earlier outlook for economic growth by as much as 9 percent this year and in 2008, predicting growth of 2.25 to 2.5 percent. Inflation is also tracking at similar levels, wiping out any growth.
Bernanke acknowledged that rising inflation is the Fed’s “predominant” concern, his gloomiest public outlook thus far.
The economy has been stagnant in the first quarter, edging up barely 0.7 percent, the worst in four years. Results of the second quarter – dragged down by the collapsing housing market and slowing retail sales – won’t be released until later this month.
“The declines in residential construction will likely continue to weigh on economic growth over coming quarters,” Bernanke said. [email protected]