MercoPress. South Atlantic News Agency

Bernanke: US housing slump “a drag on growth” well into 2008

Federal Reserve chairman Ben Bernanke revived fears Wednesday that the housing slump could derail a pick-up in the US economy. In his semiannual testimony before the US Congress, Bernanke predicted “moderate” economic growth through the second half with “a bit” of strengthening in 2008.

The Fed trimmed its real GDP growth forecast to 2.25%-2.5% this year. That's a bit slower than 2.5%-2.75% at his last appearance before Congress in February. Bernanke said the housing slump is now expected to be a drag on growth well into 2008. Bernanke comments dented recent stock market optimism, with the key US and European markets losing ground. The New York-based Dow Jones closed down 53.3 points, or 0.3%, at 13,918.2, a day after an extended rally saw it touch the 14,000 mark for the first time. On the other side of the Atlantic, the UK's main stock market FTSE 100 dropped 92 points, or 1.38%, to close at 6,567.1 as investors worried about the affect a slower US economy would have on the earnings of many of the businesses listed. French and German shares also reacted badly. The dollar fell to a 12-year low on the worsening U.S. growth forecasts. The Fed chairman also made it clear that monetary policy will lean toward containing price pressures rather that spurring growth. However the Fed still bets that core inflation will continue to edge lower in the range of the unofficial 2% limit until early 2008. Earlier on Wednesday, the US Labor Department said the consumer price index rose 0.2% last month as higher food costs offset a dip in gasoline prices. The core CPI also rose 0.2%, as expected. Core inflation held at 2.2%, still above the Fed's 1%-2% "comfort zone." However, the Fed's favored inflation gauge, the core PCE deflator, came in at 1.9% in May. Regarding the housing slump Bernanke said "declines in residential construction will likely continue to weigh on economic growth over coming quarters" but added that the magnitude of the growth should "diminish over time". Housing starts rose 2.3% in June, the Commerce Department said Wednesday. But permits, a sign of future building plans, dived 7.5% to a 10-year low. Bernanke acknowledged that troubled subprime debt has "increased concerns among investors about credit risk on some other types of financial instruments". Expectations in the housing market have been going down as monthly mortgage repayments rise and a number of lenders have made it more difficult for people with poor credit to access sub-prime mortgages. Bernanke told Capitol Hill that higher home delinquencies and foreclosures are "problems that likely will get worse before they get better".