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Bernanke Says Economic Path Unclear, Prices a Worry

Reuters
Wednesday, 28 Mar 2007 | 2:45 PM ET
Chairman Ben Bernanke's opening remarks contain references that indicate housing market prospects are uncertain.
Chairman Ben Bernanke's opening remarks contain references that indicate housing market prospects are uncertain.

Federal Reserve Chairman Ben Bernanke said on Wednesday that housing market turmoil has clouded the outlook for the U.S. economy but that the central bank remains focused on ensuring core inflation moves lower.

In testimony to the congressional Joint Economic Committee, Bernanke said inflation, outside of volatile food and energy prices, was likely to moderate gradually but that it was higher than the Fed would like and might not move down as hoped.

"Our policy is still oriented toward control of inflation, which we consider to be at this time to be the greater risk," he said in response to lawmakers' questions.

However, Bernanke also expressed concern about the slowdown in the U.S. housing market, the principal source of a deceleration in economic growth that began last spring.

"The near-term prospects for the housing market remain uncertain," he said, adding that developments in the subprime mortgage market, which caters to borrowers with weak credit histories, could stand in the way of a housing recovery.

Bernanke's discussion of risks to the housing market pushed stocks lower and helped support bond prices, which were already up on a weak report on orders for U.S.-made durable goods.

Last week, the Fed held benchmark overnight borrowing costs steady at 5.25% and said inflation was its top concern.

However, in announcing that decision, it dropped an explicit reference to the possibility of interest rate increases contained in prior statements, giving a boost to financial market expectations that a rate cut might be near.

"Uncertainties have risen and therefore a little more flexibility might be more desirable," Bernanke said when asked about the shift in the language of the Fed meeting statement.

Sticking to Forecast

Despite this heightened uncertainty, Bernanke said the U.S. central bank believed the economy was still likely to expand at a moderate pace over coming quarters, but he added that the Fed's forecast was subject to a number of risks:

"To the downside, the correction in the housing market could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector."

Federal Reserve Chairman Ben Bernanke addresses members and guests of the National Italian American foundation Tuesday, Nov. 28, 2006 in New York. Bernanke said Tuesday that risks from inflation or a worse-than-expected housing slump could further complicate things for an economy already in slowdown mode. (AP Photo/Mary Altaffer)
Mary Altaffer
Federal Reserve Chairman Ben Bernanke addresses members and guests of the National Italian American foundation Tuesday, Nov. 28, 2006 in New York. Bernanke said Tuesday that risks from inflation or a worse-than-expected housing slump could further complicate things for an economy already in slowdown mode. (AP Photo/Mary Altaffer)

He warned of possible spillover from housing sector woes to employment and consumer spending and raised the possibility that recent weakness in business spending could persist.

A government report earlier on Wednesday showed that orders for non-defense capital goods, excluding aircraft -- a signal of business investment plans -- fell 1.2% in February on the back of a 7.4% January slide.

At the same time, Bernanke laid out a number of reasons inflation could fail to moderate as the Fed has forecast.

He said the extent and timing of any deceleration in rents, which have moved up as buyers began to shun the overheated housing market, was uncertain. Rents have accounted for a large part of the increase in core inflation in the past year.

Bernanke also said it was possible that, given the tightness in the U.S. labor market, employers may begin to pass through some of their higher labor costs to prices.

"The high level of resource utilization remains an important upside risk to continued progress in reducing inflation," he said.

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