Bernanke: Fed's Top Focus Is Financial Stability

Federal Reserve Chairman Ben Bernanke told a House panel Wednesday a top Fed priority is restoring financial calm even as "too high" inflation and weak growth threaten the economy.

Bernanke, who spoke on the second of two days of semiannual monetary policy testimony, faces some congressional skepticism about a plan to backstop embattled mortgage finance enterprises Fannie Mae and Freddie Mac .

Federal Reserve Chairman Ben Bernanke.
Mary Altaffer
Federal Reserve Chairman Ben Bernanke.

The two companies own or guarantee almost half of all U.S. mortgages and policy-makers consider them vital to any recovery of the beleaguered U.S. housing market.

Rep. Spencer Bachus, the highest ranking Republican on the House Financial Services Committee, said 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 announced Sunday through Congress.

"Government and ultimately taxpayers should not assume responsibility for losses or indemnify private investors," Bachus said at the panel hearing.

Bernanke for the second day said the economy faces "serious difficulties," and described strains from the deep housing slump, tight credit, and soaring energy and commodity prices.

At the same time as growth falters, Bernanke is under pressure both within and outside the Fed for not fighting inflation more aggressively with higher benchmark interest rates, which stand at 2 percent.

However, the Fed chairman told lawmakers on Wednesday there are "significant downside risks" to the outlook for growth, suggesting the central bank is unlikely to raise rates at its August meeting.

However, fresh evidence of inflationary pressures surfaced in a government report on Wednesday that showed consumer prices jumped 1.1 percent in June, 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 told lawmakers that he agrees inflation is too high.

"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 members of the committee.

  • Video: See One Senator Take On Bernanke, Paulson

At the same time, higher oil prices are likely to force consumers and businesses to adapt, Bernanke said.

"The only silver lining to these high prices is they induce lots of incentives to conserve, incentives to provide alternatives, incentives to find and develop other oil sources," he told the panel.

Challenges to the economy from record-high oil prices have been overshadowed in recent days by worries that mortgage buyers Fannie Mae and Freddie Mac might not have enough capital to withstand the sharp housing downturn.

After the companies' share prices tumbled last week, Treasury Secretary Henry Paulson announced plans to seek authority from Capitol Hill to lend more extensively to the companies and buy equity capital if necessary.

Bernanke told lawmakers on Wednesday the companies are adequately capitalized and are not in danger of failing.

The Fed opened discount window borrowing to the companies as an immediate backstop until lawmakers approve Paulson's proposal, which is aimed at reassuring investors the U.S. government stands squarely behind the congressionally chartered but privately held firms.

However, on Tuesday, some members of the Senate expressed discomfort at approving unlimited lending to the two companies, suggesting Congress will seek to reshape the Paulson proposal.