Bernanke: Economy in Rough Time

 
 
By Reuters -  |  Posted 2008-07-17
 
 
 

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke told a House of Representatives panel on Wednesday the U.S. economy is going through a "rough time" and urged lawmakers to approve Treasury Department proposals to back up mortgage markets.

"I think the housing market is really the central element of this crisis," Bernanke told the House Financial Services Committee. "And anything we can do to strengthen the housing market, to strengthen mortgage finance, would be beneficial."

On the second day of two days of congressional testimony, the Fed chairman painted a gloomier economic picture than in recent weeks, suggesting the U.S. central bank is unlikely to raise benchmark rates from the current 2 percent at its next meeting on August 5.

Underscoring the recent economic deterioration, minutes of the Fed's last meeting on June 24-25, released on Wednesday, showed officials thought at the time they might be able to begin raising benchmark interest rates from 2 percent as soon as August.

PUBLIC PAIN, PRIVATE GAIN

For the second day in a row, Bernanke sought to convince sometimes skeptical members of Congress to send a strong signal to financial markets that the U.S. government stands behind embattled mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) by approving a backstop package proposed on Sunday.

Treasury Secretary Henry Paulson also returned to Capitol Hill in a bid to win backing for his plan to extend unlimited credit and the possibility of equity purchases to the companies.

The mortgage enterprises' share prices slid abruptly last week amid worry they may lack sufficient capital to weather crumbling housing markets. Policy-makers consider them vital to any recovery of the beleaguered housing market, and Paulson's plan had backing from the Fed, the White House, and congressional leaders.

The Fed chairman said the two companies, with small exceptions, are now the only companies securitizing mortgages.

"I would advise prompt action on housing issues, including Fannie and Freddie," he said.

But Rep. Spencer Bachus, the highest ranking Republican on the House Financial Services Committee, told Bernanke that taxpayers should not be on the hook for losses incurred by publicly traded companies.

Bachus said he was concerned about an approach "where investors reap market gains and taxpayers are stuck with the losses."

His concerns echoed those expressed by several Senators on Tuesday, raising questions about how quickly the administration can push its package of confidence-boosting measures through Congress.

Shares of the two companies jumped on Wednesday after big mortgage lender Wells Fargo reported stronger-than-expected earnings, countering a trend of bleak news in the financial sectors.

TOUGH CONDITIONS

Speaking about economic conditions, Bernanke acknowledged that rising unemployment, tight credit and higher prices are pinching many people, even though the economy continues to grow.

"This is clearly a rough time," he said in response to questions from lawmakers. "Conditions are tough on average families," he added.

But the Fed is also increasingly worried that inflation may be flaring, as the minutes of the June meeting emphasized.

Bernanke is under pressure both within and outside the Fed for not fighting inflation more aggressively with higher benchmark interest rates.

Fresh evidence of inflationary pressures surfaced in a government report on Wednesday showing consumer prices rose in June by the biggest amount since September 2005 in the aftermath of Hurricane Katrina, as gasoline prices surged.

Even when volatile food and energy costs were stripped out, consumer prices rose more than expected.

Bernanke assured lawmakers that inflation is a concern for the central bank.

"Inflation is currently too high," Bernanke said. "And it's a top priority of the Federal Reserve to run a policy that is going to bring inflation to a acceptable level consistent with price stability," he said in response to questions from the committee.

(Reporting by Mark Felsenthal; Editing by Neil Stempleman)