Bernanke: Economic growth will be slower

Even if the demand for housing were to stabilize somewhat, the pace of new home building will probably fall as builders work down excess stocks of unsold homes, he said.

“Thus declines in residential construction will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time,” Bernanke said.

Bernanke also outlined efforts by regulators to deal with problems in the market for risky mortgages. Those are mortgages made to people with spotty credit histories.

Foreclosures and delinquencies for these “subprime” mortgages have spiked. Some big subprime lenders have been forced out of business.

Borrowers and lenders have been clobbered by rising interest rates and weak home values. Congress has blasted the Fed and other regulators for not doing enough to crack down on lax lending standards, which had contributed to the problems.

“Rising delinquencies and foreclosures are creating personal, economic and social distress for many homeowners and communities — problems that likely will get worse before they get better,” Bernanke said.

To better protect consumers, the Fed is looking at ways to improve mortgage disclosure and ways to curb unfair or deceptive lending practices. It also is encouraging lenders to work with troubled homeowners.

"We are conducting a top-to-bottom review of possible actions we might take to help prevent recurrence of these problems," Bernanke said.

Rep. Spencer Bachus, R-Ala., talked about problems involving rogue mortgage brokers losing licenses in one state but then setting up shop in another. Bernanke said it might be helpful to have federal licensing or some federal data base to keep track of problem brokers.

Bachus also talked about problems involving rogue mortgage brokers losing licenses in one state but then setting up shop in another. “Basically — to me, they’re criminals,” he said. “And they’re inflicting a tremendous amount of pain.”

On another issue, Bernanke said hedge funds and private equity firms can spread risk, boost liquidity and thus can be good for national economic activity. “They certainly are a benefit to the economy,” he said. There’s an effort in Congress to raise taxes on these firms.

In new economic projections, the Fed expects the economy to grow between 2.25 and 2.50 percent, as measured from the fourth quarter of last year to the fourth quarter of this year. That’s lower than the old forecast of 2.5 percent and 3 percent.

For 2008, the economy should pick up and expand between 2.50 and 2.75 percent.

“Core” inflation, meanwhile, should increase by 2 percent and 2.25 percent this year, the same as the previous projection. Core inflation excludes the more volatile categories of energy and food.

The unemployment rate — currently at 4.5 percent — could rise as high as 4.75 percent this year, which would still be considered relatively low by historical standards. That’s also unchanged from the Fed’s old forecast.

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