Bernanke: Economic growth will be slower

updated 2:58 p.m. ET July 18, 2007

WASHINGTON - Federal Reserve Chairman Ben Bernanke told Congress Wednesday that the economy has emerged from its anemic spell, but overall growth for the year will be lower than expected. Inflation remains the chief concern, he said.

Delivering a midyear Fed economic report to Capitol Hill, Bernanke struck a somewhat cautious tone. He suggested that the economy appears likely to expand “at a moderate pace” over the second half.

Still, the Fed chief told the House Financial Services Committee that growth this year will be a bit slower than the Fed projected in February. Growth should strengthen a bit next year, he said. The inflation forecast, however, wasn’t changed. It calls for prices other than food and energy to edge lower.

Against this backdrop, the Fed is likely to leave interest rates where they are through the rest of this year.

Against this backdrop, the Fed is likely to leave interest rates where they are through the rest of this year. “They aren’t moving,” said Stuart Hoffman, chief economist at PNC Financial Services Group.

For just over a year, the Federal Reserve has held a key interest rate at 5.25 percent, providing a period of stability to borrowers. Before that, the Fed had boosted rates for two years to fend off inflation.

On Wall Street, stocks fell. The Dow Jones industrials closed down 53 points, after having slid as much as 134 points during the session. Investors reacted uneasily to Bernanke’s assessment of the economy and news that two Bear Stearns Cos. hedge funds were essentially worthless.

Bernanke took pains Wednesday to hedge the Fed’s bets and outline risks to the economy.

One risk is that energy and commodity prices could continue to rise sharply, boosting the prices of lots of other goods and services and thus spreading inflation through the economy.

The Fed “has consistently stated that upside risks to inflation are its predominant” concern, Bernanke said.

The panel’s chairman, Rep. Barney Frank, D-Mass., said that finding “troubles me.” In Frank’s view, the biggest problem is the growing gap between low-wage and high-wage workers. Democrats have accused the Bush administration of not doing enough to narrow this gap.

Overall consumer prices calmed down in June, the government reported Wednesday. They rose by just 0.2 percent — the smallest increase in five months. Gasoline prices, however are now hovering past $3 a gallon.

Another risk is that the housing slump could turn out worse than expected, sapping consumer spending and possibly causing overall economic growth to be weaker, Bernanke said.

Housing starts rose slightly last month, the government reported Wednesday, but building permit activity, a sign of future construction plans, sank to its lowest rate in 10 years, signaling further weakness in the listless sector.

The economy barely budged in the first quarter, growing at pace of just 0.7 percent, the worst in more than four years. The sour housing market was the principal culprit.

But other factors in that dismal performance — including cutbacks in inventory investment by businesses, weak federal defense spending and a bloated trade deficit — are showing some signs of improvement. Given that, the economy could grow close to 3 percent in the April-to-June quarter, Bernanke said. The government’s estimate of second-quarter growth will be released later this month.

The housing market will remain sluggish for some time, partly because of some now tighter lending standards and the recent rise in mortgage rates, Bernanke said.

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