WASHINGTON (AFP) - With market turmoil intensifying on fears of a banking crisis, Federal Reserve chairman Ben Bernanke faced a new grilling Wednesday after warning of a bumpy road to economic recovery.
Bernanke was set to appear in the House of Representatives for a second day of testimony on the Fed's semiannual economic report.
Also on tap for jittery markets was report on US consumer inflation and the Fed's minutes from its June meeting where policymakers halted their string of rate cuts.
The Fed report lifted its 2008 outlook for the US economy in a forecast that appears to show no recession. But Bernanke warned of numerous risks including a potentially troublesome rise in inflation and strained credit markets.
The Fed chairman said a "top priority" of the central bank would be to keep financial markets functioning, and that the Fed was paying close attention to the woes of mortgage giants Fannie Mae and Freddie Mac.
"The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities," he said.
President George W. Bush meanwhile expressed confidence the country would emerge from its current malaise.
"We're going through a tough time, but our economy is growing, consumers are spending, exports continue increasing and American productivity remains strong," Bush told a news conference.
"We can have confidence in the long-term foundation of our economy, and I believe we will come through this challenge stronger than ever before."
The central bank projected 2008 growth in a range of 1.0 to 1.6 percent, up from an April projection of 0.3 to 1.2 percent. The inflation outlook was hotter at 3.8 to 4.2 percent for overall prices but the outlook for "core" inflation excluding food and energy was unchanged at 2.2 to 2.4 percent.
Bernanke said the Fed was monitoring the "considerable stress" in financial markets that has affected Fannie Mae and Freddie Mac.
"In general, healthy economic growth depends on well-functioning financial markets," he said.
"Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve."
Bernanke said the US banking system is sound but expressed concerns about banks' ability to keep enough credit flowing to lift economic growth.
The comments came amid deepening worries about the banking system in the wake of the seizure by US regulators of California-based IndyMac, the biggest bank failure in decades, and a horrific slump in shares of many banks.
"Our banking system is well-capitalized," Bernanke said.
"My concerns have turned more ... on their ability to extend the credit that our economy needs to keep growing."
Stock markets meanwhile saw a wild ride, with many European bourses tumbling two percent. Wall Street shares swung in both directions before the Dow Jones Industrial Average fell 0.8 percent, closing below 11,000 for the first time in two years. Freddie Mac tumbled another 26 percent and Fannie Mae 27 percent.
Fred Dickson, market strategist at DA Davidson & Co., cited the "most hostile market sentiment we have witnessed since the dark days of 1974 when president (Richard) Nixon resigned in disgrace."
Despite Bernanke's efforts to reassure markets, economist Brian Bethune at Global Insight said: "We get the impression that the Fed is once again underestimating the systemic risk to the financial system, and the economy."
Kevin Giddis, analyst at Morgan Keegan, added that "the financial fear trade, along with weakening economic conditions, is creating a very unsettling environment for a growing number of investors ... this is getting serious and I am not sure who won't be touched and where it will end."
Bernanke said inflation risks remained to the upside while the growth outlook could be revised downward, and reiterated a need to keep inflation expectations in control.
As usual, Bernanke gave no clue on the next move on interest rates after the central bank brought rates down over the past 10 months to 2.0 percent. But he added that the uncertain outlook makes it especially difficult to position monetary policy.
"Given the high degree of uncertainty, monetary policy makers will need to carefully assess incoming information bearing on the outlook for both inflation and growth," he said.
Source: http://news.yahoo.com/s/afp/20080716/bs_afp/useconomybankoutlookgrowth;
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