Bernanke: GDP Growth Will Be Well Below Its Potential

Real gross domestic product will grow “at a pace appreciably below its potential rate in the second half of this year and then to gradually pick up as financial markets return to more-normal functioning and the housing contraction runs its course,” Federal Reserve Board chairman Ben Bernanke told the Joint Economic Committee of Congress yesterday, according to prepared text of the testimony released by the Fed.

Bernanke called second-quarter real economic activity “surprisingly resilient” but said he saw broad deceleration in the economy recently. “In particular, the intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant further drag on growth,” he said. “The downside risks to the outlook thus remain a significant concern.”

The recent stresses can be seen on a slowdown in consumer spending, he said, noting that car sales have slumped even as demand for homes seems to “hint at some stabilization.”

The inflation outlook is “highly uncertain,” Bernanke reiterated. “The prices of oil and other commodities, while remaining quite volatile, have fallen, on net, from their recent peaks, and the dollar is up from its mid-summer lows.”

“Indeed, the fluctuations in oil prices in the past few days illustrate the difficulty of predicting the future course of commodity prices,” he added. “Consequently, the upside risks to inflation remain a significant concern as well.”

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