Bernanke: economy faces 'numerous difficulties'
WASHINGTON (AP) - July 15, 2008 At the same time, Bernanke, testifying before the Senate Banking
Committee, 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.
On Wall Street, stocks slumped. The Dow Jones industrials were
down around 50 points, after suffering steeper losses earlier in
the morning.
Bernanke's testimony comes just two days after the Fed and the
Treasury Department came to the rescue of mortgage giants Fannie
Mae and Freddie Mac, offering to throw them a financial lifeline.
The Fed chief was later joined by Treasury Secretary Henry
Paulson and Securities and Exchange Commission Chairman Chris Cox,
who were summoned to detail the rescue plan.
The two companies hold or guarantee more than $5 trillion in
mortgages - almost half of the nation's total. The Bush
administration is asking Congress to temporarily increase lines of
credit to Fannie and Freddie and to let the government buy their
stock. The Fed has offered to let the companies draw emergency
loans.
The pledges of aid have raised concerns about the government's
role in such financial problems and the risk to taxpayers.
Sen. Christopher J. Dodd, D-Conn., the Banking Committee
chairman, called the plan "unprecedented."
Dodd said the rescue raises serious questions "about the nature
of the economic crisis facing our nation, about the ability of
these proposals to address this crisis effectively, and about the
burden that the American taxpayer potentially is being asked to
carry."
Paulson said that if the government extends any financial
backing to the two institutions it will be done "under terms and
conditions that protect the U.S. taxpayer." He didn't provide
details.
Sen. Richard C. Shelby of Alabama, the panel's senior
Republican, cautioned, "I fear that we're sitting on a financial
powder keg."
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.
"Given the high degree of uncertainty" about the Fed's
economic outlook, Fed policymakers will need to carefully assess
incoming information about inflation and economic growth, he said.
The Fed in June signaled an end to its nearly year long
rate-cutting campaign because of growing concerns about inflation.
Bernanke kept up his tough anti-inflation talk on Tuesday but
stressed many other problems that could short circuit economic
growth. He seemed to be keeping his options open in terms of rates.
Given all the risky cross currents, economists believe the Fed will
leave rates alone when they meet on Aug. 5.
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.
Bernanke, in the first day of back-to-back appearances on
Capitol Hill, said investors are nervous in general because of the
cloudy outlook for the economy and credit conditions, feeding a
vicious cycle that can be hard to break.
"Many financial markets and institutions remain under
considerable stress, in part because the outlook for the economy
and thus for credit quality, remains uncertain."
The Fannie and Freddie troubles came on the heels of the failure
of IndyMac, a big bank. "Its failure ... was inevitable,"
Bernanke said because the bank was weighted down by low-quality
mortgages. "All banks are being challenged by credit conditions
now," he said, adding that the Fed is keeping close tabs on the
nation's banking sector.
And, earlier this year, a run on investment bank Bear Stearns
pushed the company to the edge of bankruptcy and into a takeover by
JPMorgan Chase, which was backed financially by the Fed. That was a
controversial move that prompted critics to call it a government
bailout, putting taxpayers money at risk.
Bernanke defended its decisions in the cases of Bear Stearns as
well as Fannie and Freddie, and rebuffed claims that the government
is helping Wall Street at the expense of Main Street. If problems
aren't contained, they can ripple throughout the economy, hurting
everyone, he said. "Financial stability is critical to economic
stability."
The Fed, in new projections, now believes inflation will be
higher this year than previously thought, with prices rising as
high as 4.2 percent under one inflation measure.
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. The
unemployment rate, which could rise as high as 5.7 percent this
year, is the same as earlier projections.