Housing's Hurt Spoils His View

Homeowners' 'Distress' Will Get Worse, Bernanke Says

Federal Reserve policymakers expect the slumping housing market to restrain U.S. economic growth this year and next, as more Americans fall behind in their mortgage payments and lose their homes to foreclosure, Chairman Ben S. Bernanke told Congress yesterday.

Home sales are likely "to remain sluggish for a time" while declining home construction "will likely continue to weigh on economic growth over coming quarters," Bernanke said in testimony to the House Financial Services Committee. "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, responding to criticism that the Fed should have done more to prevent the current mortgage market turmoil, devoted much of his testimony to describing the Fed's efforts to curb foreclosures and crack down on abusive lending practices.

Barney Frank (D-Mass.), the committee chairman, welcomed Bernanke's comments on consumer protection issues, calling them "a step forward" from the Fed chief's traditional focus on the economy and interest rate issues. "It was not Uncle Alan's semiannual report," Frank said, referring to Alan Greenspan, Bernanke's predecessor .

Bernanke's testimony reflected a slightly darker economic outlook than the one he and his colleagues shared in February, when he delivered the Fed's previous economic report to Congress. Then, many Fed officials expected the housing market to improve enough this spring that the economy would rebound by year end to its long-term average growth rate of about 3 percent. Now, most Fed officials expect the economy to continue to expand at a more moderate pace of around 2.5 percent through 2008.

Fed policymakers, however, have not changed their forecasts for inflation or unemployment. They expect inflation to ebb through next year, while joblessness ticks up to about 4.7 percent from its current 4.5 percent level.

Those projections and Bernanke's comments strengthened many analysts' expectations that the Fed is likely to hold short-term interest rates steady for the foreseeable future. The central bank has held its benchmark rate at 5.25 percent for a year, after lifting it steadily for two years to dampen inflation pressures.

Stock prices fell on the Fed's forecast for slower economic growth, which could depress profits. Bond prices rose as some investors bet that the Fed still might cut interest rates later this year.

Bernanke repeated that the Fed sees higher inflation as a greater risk than slow growth. "We have to be quite vigilant about inflation at this juncture," he said.

The Labor Department said yesterday that consumer prices rose 0.2 percent in June, held down by falling energy prices. The department's consumer price index, a widely followed inflation gauge, rose 2.7 percent in the 12 months ended in June.

Bernanke noted that so-called core inflation measures, which strip out food and energy prices, have improved. But he said it was too soon to know if the improvement is temporary or constitutes a trend. Moreover, he noted, "sizable increases in food and energy prices have boosted overall inflation and eroded real incomes in recent months -- both unwelcome developments."

Because food and energy prices have been volatile, core inflation measures may be better gauges of underlying inflation trends, he said.