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Bush, Bernanke calm US economy fears

Latest update : 2008-07-15

US President George W. Bush gave a press conference Tuesday to give reassurances about the US economy. Fed chairman Ben Bernanke delivered an address similar in tenor before Congress.

As financial market turmoil intensified on worries of a banking crisis, US President George W. Bush and Federal Reserve chairman Ben Bernanke sought Tuesday to calm jitters while warning of a bumpy road to economic recovery.

Bush expressed confidence the country would emerge "stronger than ever before" from its current malaise.

"We're going through a tough time, but our economy is growing, consumers are spending, exports continue increasing and American productivity remains strong," Bush told a news conference.

"We can have confidence in the long-term foundation of our economy, and I believe we will come through this challenge stronger than ever before," he said.

Bernanke meanwhile said the Federal Reserve lifted its outlook for the US economy in 2008 in a forecast that appears to show no recession. But he warned of numerous risks including a potentially troublesome rise in inflation and stressed financial markets.

The Fed chairman said a "top priority" of the central bank would be to keep financial markets functioning, and that the Fed was paying close attention to the troubles of mortgage giants Fannie Mae and Freddie Mac.

Delivering his semiannual forecast to Congress, Bernanke indicated that his outlook for better growth and cooling inflation remained subject to a "high degree of uncertainty."

"The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities," he said.

The central bank projected 2008 growth in a range of 1.0 to 1.6 percent, up from an April projection of 0.3 to 1.2 percent. The inflation outlook was hotter at 3.8 to 4.2 percent for overall prices but the outlook for "core" inflation excluding food and energy was unchanged at 2.2 to 2.4 percent.

Bernanke said the Fed was monitoring the "considerable stress" in financial markets that has affected Fannie Mae and Freddie Mac.

"In general, healthy economic growth depends on well-functioning financial markets," he said.

"Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve."

Bernanke said the US banking system is "well-capitalized" but expressed concerns about banks' ability to keep enough credit flowing to lift economic growth.

The comments came amid deepening worries about the banking system in the wake of the seizure by US regulators of California-based IndyMac, the biggest bank failure in decades, and a horrific slump in shares of many banks.

"Our banking system is well-capitalized," Bernanke told the Senate Banking Committee, where he delivered the Fed's semiannual economic outlook.

"My concerns have turned more -- have turned less on the solvency of these institutions and more on their ability to extend the credit that our economy needs to keep growing because in many cases banks are deleveraging or shrinking or reluctant to raise the extra capital needed to take advantage of business opportunities. So that's more my concern than solvency concerns."

Stock markets meanwhile saw a wild ride, with many European bourses tumbling two percent. On Wall Street, the blue-chip Dow Jones industrials slumped 200 points before recovering to see a small gain in volatile action.

Treasury Secretary Henry Paulson told the banking committee: "As you know, our financial markets have been experiencing turmoil since last August. It will take additional time to work through challenges and progress has not come in a straight line."

Bernanke said that inflation risks remained to the upside while the growth outlook could be revised downward, and reiterated a need to keep inflation expectations in control.

"The currently high level of inflation, if sustained, might lead the public to revise up its expectations for longer-term inflation," he said.

"If that were to occur, and those revised expectations were to become embedded in the domestic wage- and price-setting process, we could see an unwelcome rise in actual inflation over the longer term. A critical responsibility of monetary policy makers is to prevent that process from taking hold."

As usual, Bernanke gave no clue on the next move on interest rates after the central bank brought rates down over the past 10 months to 2.0 percent. But he added that the uncertain outlook makes it especially difficult to position monetary policy.

"At present, accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policy makers," he stated.

"Given the high degree of uncertainty, monetary policy makers will need to carefully assess incoming information bearing on the outlook for both inflation and growth."

The Fed chief stated that the economy "has continued to expand, but at a subdued pace" that will remain sluggish for some time. But the outlook offered no indication of an outright contraction or recession.

Date created : 2008-07-15