Page last updated at 22:00 GMT, Tuesday, 15 July 2008 23:00 UK

Fed boss warns of growth 'risks'

Ben Bernanke says the US economy is facing difficulties

The boss of the US Federal Reserve Ben Bernanke has warned that there are still "downside risks" to growth in the world's largest economy.

He also said that the "upside risks" to inflation had intensified recently.

Separately, President Bush said the economy was "remarkably resilient", but urged Congress to pass legislation to help homeowners as soon as possible.

He defended plans to help mortgage firms Fannie Mae and Freddie Mac but denied they were being bailed out.

'Special case'

Plans to offer the mortgage institutions Fannie Mae and Freddie Mac access to fresh credit, if called upon, were necessary to stabilise the mortgage market and boost confidence, President Bush said.

However, he stressed that the two firms should remain shareholder owned.

I know there is a lot of nervousness
President George W. Bush

Government moves to support Fannie Mae and Freddie Mac - which between them guarantee nearly half of US mortgage debt - came after concerns about their exposure to rising mortgage foreclosures saw their share prices collapse.

The government's response showed it was prepared to take tough decisions, President Bush said, adding that he hoped the action would "calm nerves" among the public and financial markets about the state of the economy.

Despite the problems faced by mortgage lenders and Wall Street institutions, he said that the country's banking system was "basically sound".

"We felt a special need to step up to provide, if needed, temporary assistance," he said of the support for the two mortgage institutions.

"It is really important for people to have confidence in the mortgage market and for there to be stability in the mortgage market," he added.

'Tough times'

While acknowledging the economy was facing "tough times", President Bush said long-term prospects were still good and shrugged off talk of a possible recession.

"I know there is a lot of nervousness but the economy is growing, productivity is high and trade is up."

However, his comments failed to allay market jitters with the Dow Jones index of leading shares closing below the 11,000 mark for the first time in two years.

Testifying before Congress, Mr Bernanke said the economy faced "numerous difficulties" but expressed hope that the slump in house building could begin to "level out" by the end of the year.

President Bush speech on the economy

President Bush and Fed boss Mr Bernanke's comments come as problems in the US housing market weigh on the wider economy, slowing consumer spending and boosting recession fears.

Figures published on Tuesday showed a sharp rise in wholesale price inflation, due to the rising cost of oil, as well as growing pressure on household budgets.

Retail spending rose a weaker-than-expected 0.1% last month, showing that higher living costs and declining confidence have made consumers much more cautious.

With consumer spending accounting for nearly two-thirds of overall economic output, this suggests growth in the US economy could be minimal in the second half of 2008, analysts said.

Balancing act

Earlier this month, the Fed left its main interest rate unchanged at 2%, as it tries to strike a balance between helping avoid a recession and containing rising prices.

The US is not alone in dealing with these twin economic problems, and the UK is wrestling with slower growth and quickening inflation.

Analysts have said that accelerating consumer price growth may mean they are unable to cut interest rates to stoke up growth.

"The Fed's having a difficult time, as are most other central banks, as to what the next move should be," said Dustin Reid of ABN Amro.




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