Fed: Growth, Inflation Risks Are Increasing

The chairman of the Federal Reserve, Ben Bernanke, abandoned his June assessment that the threat of an economic downturn had diminished, telling lawmakers that growth and inflation risks are increasing.

There are "significant downside risks to the outlook for growth," and "upside risks to the inflation outlook have intensified," Mr. Bernanke said in semiannual testimony on the economy to the Senate Banking Committee in Washington. Mr. Bernanke's shift reflects renewed turmoil in markets that forced the Treasury and Fed to mount a rescue of Fannie Mae and Freddie Mac this week. He said that stabilizing financial markets remains "a top priority." The Fed chief spoke less than two hours after government figures showed that the economic boost from American tax rebates began to fade in June and inflation pressures increased.

"Clearly, policy is on hold," the chief economist at RBS Greenwich Capital Markets and a former Fed economist, Stephen Stanley, said. "They are relatively concerned about the second half of the year."

Mr. Bernanke cited higher energy prices, reduced access to credit, and a further deepening in the housing recession as dangers to growth. At the same time, he said: "We must be particularly alert to any indications, such as an erosion of longer-term inflation expectations, that the inflationary impulses from commodity prices are becoming embedded" in wages and prices.