Bernanke on the state of the economy

Federal Reserve Chairman Ben Bernanke spoke before the U.S. Senate earlier today:

The housing finance crisis and spiraling energy costs will remain a drag on the U.S. economy for the rest of the year, Federal Reserve Chairman Ben Bernanke told lawmakers in a gloomy presentation about the economic outlook.

"The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities," Bernanke told the Senate Banking Committee early Tuesday.

The nation's top central banker warned "many financial markets and institutions remain under considerable stress, in part because the outlook for the economy, and thus for credit quality, remains uncertain." ...

The combination of rising commodity prices and tighter credit "has sapped household purchasing power even as they have boosted inflation," Bernanke said.

Bernanke added that spending has held up better than expected, helped by the Treasury's economic stimulus program, which has so far pumped $92 billion into the economy. At the same time, he warned that spending by consumers "seems likely to be restrained over coming quarters" and that businesses also are likely to be cautious with spending plans.

He also expressed concerns about rising inflation risks due to high commodity prices, suggesting that the Fed might not be able to take steps to support economic growth because of the risk that they would feed inflation pressures.

Despite Bernanke's gloomy outlook — his most pessimistic since he took office in 2006 — he said the Fed had raised its forecast for overall economic growth. It is now looking for 1% to 1.6% growth for all of 2008, up from its April forecast of 0.3% to 1.2% growth.