Bernanke foresees slow U.S. growth

The U.S. economy is in for slow growth for the next several years, and there is much uncertainty even in that prediction, U.S. Federal Reserve chairman Ben Bernanke said Tuesday.

If the forecast is wrong, there is a greater chance that growth will be slower than expected, rather than faster, he told the Senate Banking Committee.

For the rest of 2008, "output would expand at a pace appreciably below its trend rate," and "growth is projected to pick up gradually over the next two years as residential construction bottoms out and begins a slow recovery and as credit conditions gradually improve," he said in his prepared text.

But members of the Fed committee that makes key decisions, including setting interest rates, "indicated that considerable uncertainty surrounded their outlook for economic growth and viewed the risks to their forecasts as skewed to the downside," Bernanke said

He laid out the factors that define the "significant challenges" for the central bank, which must balance between stimulating a weak economy, and fighting inflation.

The economy is fragile, and facing strains from interrelated problems, including:

Higher oil prices.Tight credit markets.Turmoil in financial markets.Weak real estate.Higher unemployment.

The Fed has tried to address the liquidity problems facing financial companies, such as Freddie Mac and Fannie Mae, he said. "Although these policy actions have had positive effects, the economy continues to face numerous difficulties."

Bernanke also said the U.S. government's fiscal stimulus — tax rebates of up to $600 US a person, $1,200 for couples, and $300 per child — is helping but "overall, consumption spending seems likely to be restrained over coming quarters."

Meanwhile, rising oil and food prices are pushing inflation to an annual rate of nearly 3.5 per cent in the first five months of 2008.

Central banks, including the Fed, have been more focused on inflation recently. Rather than boosting the economy by cutting interest rates, they are holding rates steady — as the Bank of Canada did Tuesday — to limit demand.

Many U.S. economists expect the Fed will leave rates unchanged at its next meeting, Aug. 5.

The Fed has offered emergency loans to Fannie Mae and Freddie Mac because of their key role in the U.S. mortgage markets. They hold or guarantee more than $5 trillion of U.S. mortgages, almost half the total, and if they got into trouble, the consequences would be dire for the world economy.

The U.S. government has asked Congress to temporarily increase their lines of credit to Fannie and Freddie. President George W. Bush on Tuesday asked legislators to pass the law promptly.

With files from the Associated Press

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