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All eyes on Fed chief as US economy slows

August 27, 2010

Federal Reserve chief Ben Bernanke will offer a fresh assessment Friday of the weakening US economy as the government is expected to slash nearly half of projected growth for the second quarter.

With markets haunted by fears the world's largest economy may slip back into recession, Bernanke's speech on "the economic outlook and the Federal Reserve's policy response" at a central bankers' conference could not be more timely.

Just before his much anticipated address, the government is forecast by most economists to sharply revise gross domestic product growth in the second quarter to 1.4 percent from 2.4 percent projected previously.

With most recent economic data falling below already modest expectations, economists are also reducing their growth forecast for the third quarter with some warning of a potential recession, from which the United States emerged just a year ago.

"It seems reasonable to expect the Fed Chairman to use this occasion, first to diagnose the economy's persisting ills and offer some interpretation of how recent developments may have changed the outlook," said Nomura economist David Resler.

Speaking from Jackson Hole, the plush ski resort in the Grand Teton Mountains in Wyoming state, Bernanke may lay out a roadmap of policy options to address the recent deterioration in the outlook, Resler said.

A Princeton scholar of the Great Depression, Bernanke could also touch on the prospect of additional "exceptional measures" the Fed could take to beef up the economy.

The Fed has already pumped in hundreds of billions of dollars into the economy since a home mortgage meltdown triggered the worst financial crisis in decades and plunged the economy into recession in December 2007.

The central bank has also slashed interest rates to virtually zero percent to spur growth.

The economy first emerged from recession with a 1.6 percent growth rate in the third quarter of 2009, rising to 5.0 percent in the final quarter.

But expansion slowed to 3.7 percent in the first quarter of 2010, 2.4 percent in the second quarter and possibly one percent in the third quarter.

Some said Bernanke may have run out of bullets.

"While we don't expect the chairman to brace the nation for a 'double dip,' he may warn that near-term growth could be insufficient to promote a sustained reduction in the country's 9.5 percent unemployment rate," Credit Suisse economist Neal Soss said.

Unemployment is the biggest concern for President Barack Obama, whose Democratic Party faces the grim prospect of losing control of Congress in November's mid-term elections.

Over the last week, government and private data exposed more serious problems.

New home sales plunged to the lowest levels in half a century and the pace of orders for goods indicated the manufacturing sector slowed markedly, with business capital spending contracting massively.

"The odds of a second dip have risen, but this owes to weaker hiring and consumer spending," said Aaron Smith, a senior economist for Moody's Economy.com.

Housing was also turning out to be a "bigger headwind" for the overall recovery, he said.

On Thursday, Wall Street shares slumped, with the Dow blue-chip index slipping below the 10,000-point sensitive level, and the US dollar fell ahead of the twin events.

"Between the revised GDP number and Federal Reserve Chairman Ben Bernanke's scheduled speech on the economy, no one was willing to make a big bet today," said Schaeffer's Investment Research's strategist Ryan Detrick.

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