Bernanke: Fannie, Freddie don't face failure

Caught between risky cross currents of plodding growth and rising inflation, Fed policymakers are facing “significant challenges” as they try to find a way to right the economy, Bernanke told lawmakers.

The Fed can’t afford to lower rates again to shore things up because it will aggravate inflation. On the other hand, boosting rates to fend off higher prices would deal a setback to the fragile economy and the already crippled housing market.

Against that background, most economists predict Bernanke and his colleagues will leave rates alone when it meets next on Aug. 5.

“I think conditions clearly call for a second stimulus,” said Rep. Barney Frank, D-Mass., chairman of the Financial Services panel.

Democrats in Congress are exploring more economic stimulus efforts to follow up on the $168 billion package, including tax rebates, enacted earlier this year.

Bernanke said it was a “bit premature” to go that route just yet but he didn’t rule out such a course of action. He repeated his belief that the most important action Congress could take was to shore up the housing market.

It’s difficult to chart a course when uncertainty abounds, Bernanke said.

Over the rest of this year, the economy will grow “appreciably below its trend rate” mostly because of continued weakness in housing markets, high energy prices and tight credit conditions.

At the same time, inflation has remained high and “seems likely to move temporarily higher in the near term,” Bernanke warned lawmakers.

On that front, consumer prices jumped 1.1 percent in June, the fastest pace since September 2005, the government reported Wednesday. Another report, from the Fed, showed industrial production rising 0.5 percent in June. However, the increase reflected an end to an automotive production strike rather than any widespread strength in the economy.

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