Economy balanced, Fed chairman says

WASHINGTON — Federal Reserve Chairman Ben Bernanke painted a portrait Wednesday of an economy that is delicately balanced to produce healthy growth and low inflation.

Developments such as a prolonged slump in the housing market or a resurgence in consumer spending could alter the outlook, Bernanke told the House Financial Services Committee in his semiannual report on the state of the economy.

He suggested that the Federal Reserve had sized up the economy correctly when it stopped raising short-term interest rates last summer. He said inflation remained the economy's greater risk.

"Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend," Bernanke said.

In particular, he forecast growth of 2.25 percent to 2.5 percent this year and 2.5 percent to 2.75 percent next year. The 2007 forecast is about 0.25 of a percentage point weaker than the Fed's prediction when Bernanke testified in February.

"To a considerable degree," Bernanke said, "the slower pace of economic growth in recent quarters reflects the ongoing adjustment of the housing sector. ... The pace of home sales seems likely to remain sluggish for some time. Declines in residential construction will likely continue to weigh on economic growth over the coming quarter, although the magnitude of the drag on growth should diminish over time."

Recent reports on inflation, Bernanke said, showed increases greater than moderate. He said one measure of consumer inflation that the Fed carefully watched was running at an annual rate of 4.4 percent for the first five months of the year. That figure is propelled by rising food and energy costs.

Without those two sectors, Bernanke said, core inflation is about 2 percent, and he called that figure a better gauge of overall future inflation.

So he stuck by the Fed's February forecast for core inflation of 2 percent to 2.25 percent in 2007 and 1.75 percent to 2 percent in 2008.

Financial analysts were not surprised by Bernanke's remarks.