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Bernanke: Economy Faces ‘Numerous Difficulties’

“Many financial markets and institutions remain under considerable stress, in part because the outlook for the economy and thus for credit quality, remains uncertain,” said Bernanke, who appeared Tuesday before the Senate Banking Committee, along with Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.

“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 [and] food,” the Fed chief said, according to prepared remarks.

“Given the high degree of uncertainty” about the economic outlook, Fed policymakers will need to carefully assess incoming information about inflation and economic growth, he said, according to the Associated Press.

The Labor Department reported Tuesday that rising costs for gasoline and food pushed inflation at the wholesale level up by a bigger-than-expected 1.8 percent in June, leaving inflation rising over the past year at the fastest pace in more than a quarter-century, according to the AP.

Core inflation, which excludes energy and food, registered more moderately in June, rising by just 0.2 percent, slightly lower than expected.

Inflation has remained high and “seems likely to move temporarily higher in the near term,” Bernanke said. He also advised that helping to shore up wobbly financial markets is critical to getting the economy back on track, he said.

“In general, healthy economic growth depends on well-functioning financial markets,” Bernanke said, according to media reports. “Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority.”

The Fed chief also noted that consumer spending and exports were keeping growth “at a sluggish pace” while housing “continues to weaken,” the New York Times reported.

Treasury Secretary Henry Paulson told the hearing the Bush administration has no immediate plans to offer emergency loans to mortgage-finance giants Freddie Mae and Freddie Mac or to purchase the stock of the two companies.

Over the weekend, the Treasury Department and Federal Reserve laid out plans to help bolster lagging confidence in the two companies, including asking Congress to increase the companies’ existing line of credit at the Treasury, and for the authority to buy unlimited stakes in the companies. The companies hold or guarantee more than $5 trillion in mortgages — almost half of the nation’s total.

Paulson told the Senate panel that the proposed assistance plan was intended to serve as a backup if needed.

He said that if the government extends any financial backing to the two institutions it will be done “under terms and conditions that protect the U.S. taxpayer.”

During a press conference Tuesday, President Bush said the nation’s financial system is “basically sound” and urged lawmakers to quickly enact legislation to prop up Fannie Mae and Freddie Mac.

Acknowledging the mix of financial issues plaguing the nation — among them high gas prices, tight credit markets and a weakened real estate market — Mr. Bush said: “It’s been a difficult time for many American families.”

However, the president sought to reassure Americans that despite the woes of Fannie Mae and Freddie Mac, U.S. depositors should not worry because their deposits are insured by the government up to $100,000.

“If you’re a depositor, you’re protected by the federal government,” President Bush said.

“I think the system is basically sound, I truly do,” Mr. Bush said, according to the AP. “I understand there’s a lot of nervousness. The economy is growing. Productivity is high. Trade’s up. People are working — it’s not as good as we’d like. And to the extent that we’ll find weakness, we’ll move.”

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