Slower economy predicted

Housing slump puts damper on growth, Fed chief says

? The U.S. economy will slow over the remaining months of this year because of a significant deterioration in the subprime mortgage market, a slowdown in residential construction and tighter credit standards for consumers and business, Federal Reserve Chairman Ben S. Bernanke said Wednesday.

Ronda Hanshy stocks shelves Wednesday at the Community Mercantile Co-op, 901 Iowa. Food costs went up again, but consumers finally got a break at the gas pumps in June, helping to lower inflation to the smallest increase in five months. The nation's economy is expected to slow during the remainder of the year because of problems in the subprime mortgage market, a decline in residential construction and tighter credit standards, Federal Reserve Chairman Ben Bernanke said Wednesday.

Bernanke said that improvements in inflation might be only temporary, signaling that he doesn’t favor lowering interest rates anytime soon. His comments came in his semi-annual report on monetary policy to the House Financial Services Committee.

Fed economists, he testified, have lowered their growth forecast for 2007 by a quarter of a percentage point. The Fed in February had forecast a growth rate up to 3 percent this year, but now expects below-trend growth of 2.5 to 2.75 percent.

Bernanke’s testimony underscored the housing sector’s drag on the U.S. economy. The Fed chief said that “conditions in the subprime mortgage sector have deteriorated significantly, reflecting mounting delinquency rates on adjustable-rate loans,” which are at record levels.

And, he said, problems in the subprime market – which involves home loans to borrowers with weak credit histories – are spreading to other financial instruments.

“Credit spreads on lower-quality corporate debt have widened somewhat, and terms for some leveraged business loans have tightened,” he said. Translation: Businesses with shakier balance sheets are finding it harder to get loans, and banks are less willing to lend for buyouts of companies if the deal involves issuing a lot of debt. But these widening credit spreads – the difference in yields between different financial instruments – remain near the low end of the historical range, Bernanke cautioned, adding that bond and business loan markets remain brisk.

However, investment bank Bear Stearns confirmed Tuesday that two of its hedge funds for rich investors, which held investments above $20 billion, have effectively gone broke because of exposure to subprime loans that had been sold into the secondary mortgage market. That’s raising fears that such problems may spread further into financial markets.

The Fed chairman devoted much of his testimony to what the Fed is doing to strengthen supervision of mortgage and home-equity lending. He expects to implement new rules to combat unfair and deceptive advertising in mortgage and home equity lending this year. Bernanke acknowledged that he’s considering supporting the idea of federally licensing mortgage brokers, whom Congress has blamed for many of the problems in the subprime mortgage market.

New data Wednesday showed that consumer core inflation grew at an annual rate of 2.3 percent for the first six months of 2007. Core inflation measures the general rise in prices after stripping out volatile food and energy prices, whose short-term fluctuations can distort broader trends.