Bernanke warns on housing, energy
Fed Chairman says mortgage defaults will get worse, and flattening oil prices not guaranteed, but remains upbeat on economy overall.
NEW YORK (CNNMoney.com) -- The economy should grow modestly this year, and even more in 2008, but a pullback in housing and the possibility of even higher energy prices pose serious risks.
That's the message Federal Reserve Chairman Ben Bernanke presented to the House Financial Services Committee during day one of his semiannual address to lawmakers on the state of the economy.
Bernanke's testimony did not seem to indicate a cut in the Fed's fund rate was coming, and the stock market declined after his speech. The Fed's fund rate, an overnight rate the central bank charges commercial banks, affects everything from corporate borrowing rates to interest on credit card debt.
On the overall economy, the Fed chairman said growth should average about 2.25 to 2.5 percent this year, and increase to 2.5 to 3 percent in 2008.
But Bernanke warned that the decline in the housing market, as well as rising energy prices, are threats to the economy and therefore the Fed needed to continue focus on inflation over job creation in its dual mandate to control prices and create jobs.
"The ongoing housing correction could prove larger than anticipated, and energy and commodity prices could continue to rise sharply" and that could "spread to other parts of the economy," said Bernanke. Therefore the "upside risks to inflation is [the Fed's] primary policy concern."
As the economy slows and the housing market slumps, some have pressured the Fed to cut interest rates as a means of spurring growth. But the Fed has so far refused, leaving rates at 5.25 percent for over a year.
During a Q&A after his testimony, Bernanke was asked if there was a risk to a "hard fall" in housing.
"We think it remains a risk, we have an inventory problem," he said.
He also said mortgage defaults will "likely get worse before they get better," although he added that over 1 million homes were still getting built every year, and the sector is about as healthy as it was in the late 1990s.
The dollar fell on the projected weakness in the housing market, and how it could further slow economic growth.
Legislators also grilled the Fed chairman over inequality in the U.S. economy, presenting several studies that showed the rich getting richer and the poor getting poorer.
"The most pressing issue facing the U.S. economy today is excessive and growing inequality," said committee chairman Barney Frank, D-Mass, although Frank did complement Bernanke for including a line in his report acknowledging flat wages for the last few years." This is not uncle Alan's semi-annual report," he said, referring to previous Fed chairman Alan Greenspan, with whom Frank often sparred.
Bernanke responded by pointing to other studies that show middle class Americans are generally much better off now than they were two decades ago.