July 19, 2007	Thursday	Rajab 03, 1428

WASHINGTON, July 18: The US economy is maintaining a “moderate” expansion pace despite a housing slump that will drag on growth into next year, Federal Reserve chairman Ben Bernanke said on Wednesday.

Bernanke, delivering his semiannual report to Congress, reiterated that inflation remains the biggest risk to the economic outlook and said that an easing of inflation pressures has “yet to be convincingly demonstrated.”

He said the central bank was cutting its forecast for 2007 growth to a range of 2.25 to 2.5 per cent, down from a 2.5 to 3.0 per cent range in the Fed’s outlook in February.

This downgrade had been widely expected in view of the weak 0.7 per cent pace of growth in gross domestic product (GDP) in the first quarter.

The lower forecast is “largely the result of weaker-than-expected residential construction activity this year,” Bernanke said in delivering the Fed’s semiannual monetary policy report to the House of Representatives’ Financial Services Committee.

The Fed also cut its forecast for GDP growth in 2008 by a quarter-point to a range of 2.5 to 2.75 per cent, suggesting the slide in the property market could extend longer than previously expected.

Addressing the troubles of subprime mortgage loans, Bernanke said this has led to “personal, economic and social distress” for many homeowners and communities and that these problems “likely will get worse before they get better.”

Still, the Fed said the economy will pull through as a result of relatively steady consumer spending, employment gains and business investment.

“The US economy seems likely to continue to expand at a moderate pace in the second half of 2007 and in 2008,” the central bank report said.

“The current contraction in residential construction will likely restrain overall activity for a while longer, but as stocks of unsold new homes are brought down to more comfortable levels, that restraint should begin to abate.”

Bernanke said the risk of higher inflation remains the “predominant” policy concern of the central bank, but that the outlook is somewhat murky.

He said hefty rises in food and energy prices have pushed up overall inflation and thereby eroded Americans’ incomes, which he called “unwelcome developments.” At the same time, he said readings on “core” inflation excluding volatile food and energy costs, seen as a better indication of future price trends, have been “favourable.”

The central bank left unchanged its forecast for core inflation of 2.0 to 2.25 per cent for 2007 and 1.75 to 2.0 per cent for 2008 -- thus coming into line with what some see as the bank's unofficial comfort zone of one to two per cent. As expected, Bernanke gave no direct hint on the central bank’s next move on interest rates. The Federal Open Market Committee has held its base rate at 5.25 per cent for the past year while highlighting inflation as the main risk.

“If energy prices level off as currently anticipated, overall inflation should slow to a pace close to that of core inflation in coming quarters,” Bernanke said.

But he warned against a situation in which inflation remains high and price increases become “embedded in longer-term inflation expectations,” which would make the Fed's job more difficult.

“With the level of resource utilisation relatively high and with a sustained moderation in inflation pressures yet to be convincingly demonstrated, the FOMC has consistently stated that upside risks to inflation are its predominant policy concern.”

In response to a question, Bernanke said central bank officials are “unhappy” with sharp rises in food and energy costs.

“But looking forward, I think the real issue for us is if there are temporary bursts in prices of food and energy, will those prices, higher prices somehow get embedded in the long-run underlying trend of inflation,” he added.

Bernanke said the Fed would be alert to other potential risks in deciding on monetary policy, including a sharper correction in housing that crimps consumer spending, or a stronger rebound in the broader economy.—AFP