WASHINGTON — Federal Reserve Chairman Ben Bernanke told Congress on Tuesday the fragile economy is facing “numerous difficulties” despite the Fed’s aggressive interest-rate reductions and other fortifying steps.
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,” Bernanke said, mostly because of continued weakness in housing markets, high energy prices and tight credit conditions.
On Wall Street, stocks slumped. The Dow Jones industrials fell 92.65, finishing at 10,962.54, the index’s lowest close since July 2006.
Bernanke’s testimony came 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.
Bernanke kept up his tough anti-inflation talk 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 crosscurrents, economists believe the Fed will leave rates alone when it meets 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.”
