Bernanke: too little growth, too much inflation
Market Watch
By Greg Robb, MarketWatch
Last update: 12:22 p.m. EDT July 16, 2008

WASHINGTON (MarketWatch) -- Federal Reserve Board Chairman Ben Bernanke said Wednesday that the U.S. economy faces a "difficult period" of too little growth and too much inflation. Speaking shortly after the Labor Department released a miserable June consumer price index, Bernanke told the House Financial Services panel that "inflation currently is too high." The data showed a 1.1% jump in headline inflation and a 0.3% rise in core prices, excluding food and energy costs.

"It is a top priority of the Federal Reserve to run a policy to bring inflation to an acceptable level consistent with price stability as we go forward," Bernanke said Bernanke clearly had a sense that the June price data was going to be poor. He told the Senate Banking Committee in his first day of testimony on Tuesday that "inflation seems likely to move temporarily higher in the near term." Although Bernanke reserved his clearest warning for a possible rate hike if consumers begin to base their economic decisions on expectation of higher prices, he was uneasy about growth as well. "The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth," Bernanke said.

Bernanke said there was no silver bullet to turn the economy around. "There is no single solution. If there were, of course, we would have used it by now," he said. "What we need to do is have a sensible, coordinated, and proactive approach that is going allow us to get through this difficult period," he said. Asked if the worst was still ahead for the economy, Bernanke replied that the Fed's formal forecast expects weak, but positive, growth in the second half of 2008. He offered a glimmer of optimism, saying that growth should be more robust as 2009 goes on as the housing and banking sector recover.

The Fed "is looking at the housing market beginning to stabilize at some point around the end of the year or early next year," he said.

"With the hope we can continue to strengthen the financial system, we would hope to see the recovery back to its more normal levels of growth in 2009," he said.

Bernanke said he didn't know if the economy was in recession. He argued that trying to pin a label on the economy was beside the point as it was clear that families were hurting.

Bernanke said that it was "premature" to say that a second stimulus package is needed. "I believe the one that was done is having some effect. At the moment, I think it is a bit premature" to call for a second package, he said.

House Financial Services chairman Barney Frank said that he supports a second stimulus package if it sends federal money to strapped states and cities.

Economists said Bernanke signaled that the Fed will hold interest rates steady at 2% until the end of the year at least.

 Josh Shapiro, chief economist at MFR Inc., said Fed monetary policy was "frozen" given the competing concerns about a possible recession or runaway prices.

Asked for his position on currency intervention, Bernanke replied that he didn't have any objection to it in principle.

"I think it [currency intervention] is something that should be done only rarely, but there may be conditions when markets are disorderly where some temporary action may be justified," Bernanke said. The Fed chief said the Fed's dollar policy was to have a strong economy.

"My belief is that if we work effectively, the dollar's strength in medium term will reflect healthy underlying economy," Bernanke told the House Financial Services panel.

In general, members of the House panel were more supportive of the White House and Fed plan to backstop Fannie Mae and Freddie Mac.

The plan, designed by Treasury Secretary Henry Paulson, would give the two mortgage giants access to emergency Fed loans until Congress approves a plan to provide additional government funding to the companies. See full story.

Some members of the Senate panel were clearly unhappy with the proposal. Sen. Jim Bunning, a Republican from Kentucky and a vocal critic of the Fed, vowed to use every parliamentary trick to block the proposal. See full story.

Bernanke said Fannie and Freddie have adequately capital and "there is nothing about to happen" to them.

He said that it was critical to the U.S. economy that the mortgage giants be more than solvent. "We want these firms not just to be solvent, which of course is critical, but we want them to play an active role in strengthening and stabilizing our mortgage markets because they are really a big part of what is going on mortgage markets right now," he said.

Greg Robb is a senior reporter for MarketWatch in Washington.

Original Text