Difficulties in American economy by Livia Cseresova

According to the chairman of Federal Reserve, Ben Bernanke, American economy is facing many difficulties, in spite of Fed’s steps like interest rate reductions.

Also, Bernanke warned that increasing costs of food and energy are rising inflation risks, even though official are trying hard to cope with various economical problems. All these problems, as Bernanke said, represent “significant downside risks” to the growth of economy and it will grow much below its trend rate over the rest of the year.

President George Bush attempted to be encouraging and said; „The bottom line is this: We're going through a tough time." and "I believe we will come through this challenge stronger than ever before."

Only two days before the Bernanke’s testimony, the Fed and the Treasury Department offered to help financially to two mortgage giants, Freddie Mac and Fannie Mae.

Mac and Mae hold or guarantee more than $5 trillion in mortgages, which is nearly the half of the nation's total, and the Bush administration asked Congress to increase lines of credit to Mac and Mae and to let the government buy their stock. The companies may draw emergency loans, as Fed let them.

Sen. Christopher J. Dodd said that the tries to rescue Mac and Mae raises questions "about the nature of the economic crisis facing our nation, about the ability of these proposals to address this crisis effectively, and about the burden that the American taxpayer potentially is being asked to carry."

As for the inflation, it is still high and according to Bernanke, it “seems likely to move temporarily higher in the near term”. The Labor Department reported that the prices jumped 1.8 percent in June, which left inflation rising over the past year at the fastest pace in more than a quarter-century.

In June, the Fed ended it almost a year long rate-cutting campaign exactly because of growing worries about inflation. The Fed thinks inflation will be higher this year than previously thought, with prices rising 4.2 percent under one inflation measure.

Bernanke said that "In general, healthy economic growth depends on well-functioning financial markets," and "Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority."

The “job one”, as Bernanke said, is strengthening regulatory oversight of Fannie and Freddie. He also said that legislative efforts to stabilize the housing market are very important.

The Mac and Mae problems followed the failure of IndyMac, a big bank. "Its failure was inevitable," Bernanke said because the bank was weighed down by low-quality mortgages.

As for the growth, it will be slow but not as bad as previously forecast, thanks to the government's $168 billion stimulus. The unemployment rate, which could rise 5.7 percent this year, is the same as earlier projections.

by Livia Cseresova for PocketNews (http://pocketnews.tv)

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posted by Lucia Adamova