Bernanke: Economy faces 'numerous difficulties'

[July 16, 2008]  WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke testifies for a second day before Congress amid a backdrop of fading confidence in the U.S. economy.

The Fed chief appears before the House Financial Services Committee on Wednesday -- one day after delivering a sober assessment of the country's economic problems to lawmakers on the Senate side.

Caught between risky cross currents of plodding growth and rising inflation, Fed policymakers are facing "significant challenges" as they try to find a way to right the economy, Bernanke told the Senate Banking Committee on Tuesday.

The Fed can't afford to lower rates again to shore things up because it will aggravate inflation. On the other hand, boosting rates to fend off higher prices would deal a setback to the fragile economy and the already crippled housing market.

Against that background, most economists predict Bernanke and his colleagues will leave rates alone when it meets next on Aug. 5.

It's difficult to chart a course when uncertainty abounds, Bernanke said.

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.

At the same time, inflation has remained high and "seems likely to move temporarily higher in the near term," Bernanke warned lawmakers.

Consumer prices are expected to climb higher in June, while industrial production probably will be flat -- fresh signs of the twin problems plaguing the country. Those economic reports will be released on Wednesday.

On Tuesday, the Labor Department reported wholesale prices, driven by skyrocketing gas and food costs, rose 9.2 percent in the 12 months ending June -- the fastest in a quarter-century.

"The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining housing prices, a softening labor market and rising prices of oil, food and other commodities," Bernanke said Tuesday.

Righting wobbly financial markets is another important consideration 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.

Bernanke's congressional appearances come just 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 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 on Capitol Hill and elsewhere about the government's role in intervening to ease such financial troubles and the risk posed to taxpayers.

[Associated Press; By JEANNINE AVERSA]

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