Fed Chief Downplays Recession Talk

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In a visit to Capitol Hill, Federal Reserve Chairman Ben Bernanke tells lawmakers he does not believe that continued weakness in the housing sector will push the economy into a recession.

STEVE INSKEEP, host:

Even though the economy is facing some big problems, the chairman of the Federal Reserve says he's optimistic.

Ben Bernanke answered some questions yesterday on Capitol Hill. Lawmakers wanted to know about the likelihood of a recession and a threat posed by all those questionable home loans. But Bernanke told senators that despite those concerns, he believes the economy will continue to grow.

Here's NPR's Jack Speer.

JACK SPEER: Bernanke's assessment of the economy was carefully balanced. He told members of the Joint Economic Committee he didn't see any evidence that problems in the subprime mortgage market were spilling over to affect the rest of the economy. But he says it's getting more difficult to be sure about that.

Mr. BEN BERNANKE (Chairman, Federal Reserve): The correction in the housing market could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector. Moreover, we could see yet greater spillover from the weakness in housing to employment and consumer spending that has occurred thus far.

SPEER: But Democratic Senator Charles Schumer wanted to know why the Fed didn't do more to prevent abusive lending from happening, and he raised questions about the Fed's ability to regulate mortgage lending when so much of it occurs outside the Fed's reach.

Senator CHARLES SCHUMER (Democrat, New York): It seems to me it makes no sense to say we're regulating the bank subprime area when it'll just shift over to the non-bank. Don't you agree with that?

Mr. BERNANKE: I agree with that and I think that looking at alternative ways of enforcing the rules is worthwhile.

SPEER: The New York senator says he plans to introduce legislation calling for national regulation of all mortgage brokers. On the prospects for recession, a subject broached by former Fed chairman Allan Greenspan recently, Bernanke aid he doesn't think that's in the cards - at least not over the next several months.

Mr. BERNANKE: There seems to be a sense that expansions die of old age, that after they reach a certain point, then they naturally begin to end. I don't think the evidence really supports that.

SPEER: Bernanke said inflation remains a bigger concern than recession for the time being.

Jack Speer, NPR News, Washington.

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Bernanke: U.S. Growth 'Moderate' as Inflation Rises

Bernanke's Testimony

The U.S. economy is growing at a slower rate than in previous quarters, according to Federal Reserve Chairman Benjamin Bernanke. In Congress, Bernanke said that the Fed is monitoring inflation along with two key variables: the housing and energy markets.

Testifying before the Joint Economic Committee of Congress, Bernanke called the current rate of expansion "more sustainable" than in previous years. He said that the slowdown, which began in the spring of 2006, is tied to a "substantial correction" in the housing market.

Noting that homebuilders cut construction as demand fell, Bernanke said that, "Even so, the inventory of unsold homes has risen to levels well above recent historical norms."

But the Fed chairman also said that the U.S. economy faces risks — among them, the chance that a housing-market correction, made more severe by the troubled subprime lending industry, could be more severe than initially predicted.

Still, Bernanke said, "The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained" — a statement that could ease investors' fears of a recession.

Noting an increase in employment levels, Bernanke said that, "Growth in consumer spending should continue to support the economic expansion in coming quarters."

Overall, Bernanke said, "the economy appears likely to continue to expand at a moderate pace over coming quarters."

Addressing inflation, Bernanke said that overall, consumer price inflation has fallen since 2006 — a change he credited to moderating energy costs. The consumer price index, or CPI, was up 2.4 percent in the past 12 months, compared with rising at a 3.6 percent rate last year.

But, in terms of core inflation, Bernanke said that "recent readings have been somewhat elevated and the level of core inflation remains uncomfortably high."

Core CPI inflation, Bernanke said, rose 2.7 percent over the twelve months ending in February, compared with 2.1 percent a year earlier.

Bernanke blamed some of the rise in core inflation on higher rents, speculating that the change is due to more people delaying the move to buy a home.

Noting that energy prices are lower than last year's record-setting highs, Bernanke said that the trend could bring stability to manufacturing and services costs and "reduce pressure on core inflation."

But, given the unpredictable nature of energy and commodity prices, Bernanke acknowledged that "they remain a source of considerable uncertainty in the inflation outlook."

In terms of the federal funds rate, which has stood at 5 1/4 percent since June 2006, Bernanke did not offer a solid prediction of where the Federal Open Market Committee might go in future meetings.

He said only that while the outlook has brightened in recent weeks, the committee will adjust the rate if new data on inflation requires it.

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