Bernanke: Economy still sliding

Testimony emphasizes elevated inflation risks

by Jeannine Aversa - Jul. 16, 2008 12:00 AM
Associated Press

Federal Reserve Chairman Ben Bernanke told Congress on Tuesday that the fragile economy is facing "numerous difficulties" despite the Fed's aggressive interest-rate reductions and other fortifying steps.

Testifying before the Senate Banking Committee, Bernanke sounded another warning that rising prices for energy and food are elevating inflation risks. This problem looms even as officials try to cope with persistent strains in financial markets, rising joblessness and housing problems.

The situation, he said, poses "significant challenges" for Fed policymakers as they try to chart the best course for keeping the economy growing, while making sure inflation doesn't dangerously flare up. All the economy's problems - including slumping home values, which threaten to make people feel less wealthy and less inclined to spend in the months ahead - represent "significant downside risks" to economic growth.

Over the rest of this year, the economy will grow "appreciably below its trend rate" mostly because of continued weakness in housing markets, high energy prices and tight credit conditions, Bernanke said.

On the economic front, inflation has remained high and "seems likely to move temporarily higher in the near term," Bernanke warned.

Indeed, before Bernanke delivered his twice-a-year comprehensive economic assessment to Congress, the Labor Department reported wholesale prices jumped 1.8 percent in June.

That left inflation rising over the past year at the fastest pace in more than a quarter-century.

Righting wobbly financial markets is key to getting the economy back on track, he said.

"In general, healthy economic growth depends on well-functioning financial markets," Bernanke said. "Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority," he said.

Strengthening regulatory oversight of Fannie and Freddie, Bernanke said, is "job one." Congress is moving ahead on a broad housing rescue package that includes provisions to tighten regulation over the two companies. Bernanke said legislative efforts to help stabilize the housing market - the biggest threat to the economy - are of vital importance.

Growth for the year will be sluggish - at best 1.6 percent growth - but not as bad as previously forecast, helped by the government's $168 billion stimulus, including rebates.