WASHINGTON -- Federal Reserve Chairman Ben Bernanke told Congress Wednesday the U.S. economy will grow gradually this year and gain steam in 2008, but warned there are many risks to the outlook and stressed the U.S. central bank is on guard against inflation.
"Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend," he said in semiannual testimony prepared for delivery to the House Financial Services Committee.
But Bernanke warned that a slowdown in the U.S. housing market may last longer than anticipated, and said that further hikes in energy and commodity prices could spark inflation and push closely watched core inflation up.
The Fed chairman also cautioned that recent moderation in core inflation, while favorable, may be the result of temporary influences. While he said he expected core inflation to "edge a bit lower, on net" over the remainder of this year and next, he made clear that policy-makers were wary about price pressures.
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"With the level of resource utilization relatively high and with a sustained moderation in inflation pressures yet to be convincingly demonstrated, the (Fed's policy panel) has consistently stated that upside risks to inflation are its predominant policy concern," he said.
Prices for U.S. government bonds and the value of the U.S. dollar held fairly steady as the testimony was released, indicating traders saw few surprises .
MODEST GROWTH SEEN
Citing a stronger-than-expected downturn in housing construction, Bernanke said the Fed now expects U.S. economic growth to expand in a range around 2.25 percent to 2.5 percent this year and 2.5 percent to 2.75 percent in 2008 — about one-quarter percentage point less than policy-makers estimated six months ago.
"To a considerable degree, the slower pace of economic growth in recent quarters reflects the ongoing adjustment in the housing sector," he said.
Bernanke added that declines in homebuilding "will likely continue to weigh on economic growth over coming quarters," but said that drag should ease over time.
The Fed chairman deplored what he described as "abusive lending practices and outright fraud" that had accompanied an expansion of mortgage lending to borrowers with blemished credit in the so-called subprime market. He promised the Fed would act to rein in abusive lending activity.
"Rising delinquencies are creating personal, economic, and social distress for many homeowners and communities — problems that likely will get worse before they get better," Bernanke warned.
At the same time, the Fed chairman said a drawdown in bloated business inventories around the start of the year was a positive sign for future economic growth. A pickup in business investment was seen as a further tonic for growth.
"Excess inventories now appear to have been substantially eliminated and should not prove a further restraint on growth," he said, adding that global expansion also appears solid, though he warned that the U.S. trade deficit likely will remain wide.
FOCUS ON CORE PRICES
Bernanke said big jumps in food and energy prices had boosted inflation, pushing the price index for personal consumption expenditures to a rate that, if it continued, "would clearly be inconsistent with the objective of price stability."
The Fed chairman said that monetary policy-makers focus on core measures of inflation as a better gauge of where price pressures are heading. He expressed hope that with long-term inflation expectations contained and futures prices suggesting that investors expect energy and commodity prices to flatten out, core inflation should ease.
The U.S. central bank has held benchmark overnight interest rates steady at 5.25 percent for more than a year in the hope that somewhat sluggish economic growth would curb price pressures.
Earlier Wednesday, the Labor Department said U.S. consumer prices rose 0.2 percent last month, both overall and excluding volatile food and energy costs. Over the 12 months through June, the core consumer price index was up 2.2 percent, the same as in May.
"The numbers show inflation is relatively contained," said Omer Esiner, a foreign exchange market analyst with Ruesch International in Washington.
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