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: