Bernanke: Growth, inflation concerns
Fed chief acknowledges troubling signs about economic growth but also issues sharp warning about inflation.
WASHINGTON (CNNMoney.com) -- The economy faces the prospect of slower growth, but increasing concerns over inflation could complicate the Federal Reserve's efforts to stimulate the economy, Fed Chairman Ben Bernanke told lawmakers Wednesday.
The central bank chief, in testimony before the House Financial Services Committee, said that the housing sector and jobs market could deteriorate further. He also warned that lending could be squeezed by tighter credit conditions.
"[I]t is important to recognize that downside risks to growth remain," Bernanke said. The Fed "will act in a timely manner as needed to support growth."
The markets turned higher Wednesday on Bernanke's testimony, as investors read signals that the Fed was prepared to continue cutting rates if necessary to stimulate the economy.
In fact, the growing consensus is that the Fed will cut interest rates by another half a percentage point when policymakers meet again on March 18.
At the same time, Bernanke warned that the recent increases in the price of energy and key commodities, as well as a weaker dollar, remain an inflationary risk and could further erode consumer spending.
"Should high rates of overall inflation persist, the possibility also exists that inflation expectations could become less well anchored," he said. The Fed will continue to monitor inflation closely in the months ahead, he added.
Bernanke, while issuing a warning about inflation, made clear that the economy faces significant drags - particularly the housing market.
"Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries," Bernanke said.
To help keep the economy from tipping into a recession, the Fed has steadily cut the federal funds rate, which affects a variety of consumer loans, since September. It slashed interest rates twice by 1.25 percentage points in just under a week last month.
Bernanke's remarks come amid recent warning signs about the economy.
A survey on residential real estate released Tuesday revealed that the decline in home prices picked up at the end of 2007. And consumer confidence fell to its lowest level in five years, the New York-based Conference Board reported, on fears about the job market and slowing business activity.
Less than two weeks ago, Bernanke and Treasury Secretary Henry Paulson warned lawmakers of slower economic growth in the coming year but said they believed the U.S. economy would avoid tipping into a recession, helped in part by the $170 billion economic stimulus package signed by President Bush on Feb. 13 and the most recent interest rate cuts by the Federal Reserve.
Bernanke sees growth, inflation concerns - Feb. 27, 2008