WORLD> America
Bernanke: Markets under stress; outlook uncertain
(Agencies)
Updated: 2008-07-16 00:37

Treasury Secretary Henry Paulson, in prepared testimony, said the government-sponsored enterprises "have the potential to pose a systemic risk" to the financial system, and urged Congress to pass legislation creating a stronger regulator.

Paulson, Bernanke, and Securities and Exchange Commission Chairman Christopher Cox are due to testify before the Senate Banking Committee later on Tuesday about Fannie and Freddie.

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Bernanke's comments offered little comfort to investors. US stock prices fell, although they clawed back some of those losses by late-morning as oil prices dropped. The dollar weakened and US Treasury debt prices rose as a safe-haven alternative to riskier assets.

In its semi-annual monetary policy report to Congress, the Fed raised its projection for growth in 2008 to a range of 1 percent to 1.6 percent from the 0.3 percent to 1.2 percent range it forecast in April, on expectations of stronger consumer spending.

President George W. Bush said the economy was still growing, although he acknowledged "obvious financial uncertainty."

With energy costs rising, the Fed also raised its inflation forecast to a range of 3.8 percent to 4.2 percent, up substantially from its previous 3.1 percent to 3.4 percent projection.

"The net is now extremely wide for the Fed, with upside inflation pressures and considerable downside growth risks," said Dustin Reid, senior currency strategist with ABN AMRO in Chicago. "The Fed's having a difficult time, as are most other central banks, as to what the next (interest rate) move should be."