U.S. Federal Reserve Board Chairman Ben Bernanke waits to speak at Harvard senior class day in Cambridge, Massachusetts June 4, 2008. Bernanke told Congress Tuesday the fragile economy is facing "numerous difficulties" despite the Fed's aggressive interest rate reductions and other fortifying steps.
(Xinhua/Reuters Photo)
Source: USA TODAY
Publication date: 2008-07-16
By Sue Kirchhoff
WASHINGTON -- A slowing economy and rapid inflation are presenting significant challenges to Federal Reserve policymakers, Chairman Ben Bernanke told the Senate Banking Committee on Tuesday.
Bernanke, presenting the Fed's twice-annual report to Congress, predicted the economy would grow through the rest of year, albeit at a weak level.
But he acknowledged that is cold comfort for consumers.
"Whether it's a technical recession or not ... the combination of declining wealth, a weak job market, rising food and energy prices, foreclosures, tight credit, all those things are putting tremendous pressure on families and ... explains why consumer sentiment is very low," Bernanke said. "People are very worried.
Still the Fed chairman said he wasn't ready to recommend that Congress pass what would be a second economic stimulus bill this year. In February Congress and the White House quickly reached agreement on a $191 billion stimulus package that included tax rebate checks for about 136 million Americans.
Democrats have been considering a host of new proposals to boost the economy, including public works projects. House Speaker Nancy Pelosi, D-Calif., said Tuesday after meeting with economists that Democrats may try to approve a second round of tax rebates.
The Fed may have reached a limit in what it can do by adjusting monetary policy, at least for now. After cutting interest rates aggressively for nearly a year, the Fed voted on June 25 to hold a key rate at 2%, citing inflation risks.
"The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks," Bernanke said. "Rising prices of energy and some other commodities have led to a sharp pickup in inflation."
Bernanke gave no clue as to future interest rate policy, saying the central bank must closely watch incoming data on both inflation and growth. The Fed is next scheduled to meet on interest rates on Aug. 5.
Bernanke said the depressed housing market is the central economic issue, creating stress in financial markets and affecting consumer wealth. The best move Congress could make would be to approve legislation helping consumers refinance out of troubled mortgages, set a stronger regulator for mortgage giants 
"The near-term focus is on stabilizing the financial situation. ... There is not even the slightest hint that the door is open to further" rate cuts, said Stephen Stanley, chief economist at RBS Greenwich Capital.
Lawmakers were generally supportive of Bernanke, though some worried the Fed was expanding powers as it takes emergency actions to grapple with the economy and credit crisis.
"Giving the Fed more power is like giving a neighborhood kid who broke a window playing baseball in the street a bigger bat, and thinking that will fix the problem," said Sen. Jim Bunning, R-Ky. (c) Copyright 2008 USA TODAY, a division of
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