The chairman of the US Federal Reserve has said restoring stability to the financial markets is the bank's priority. Ben Bernanke also told the Senate Banking Committee that balancing the risks between weak growth and high inflation was 'a significant challenge'.
He said higher energy prices, tighter credit conditions and the worsening housing market all represent big risks to the US economy. But he added that the risks to higher inflation had also intensified.
His remarks sent shares sharply lower on Wall Street.
Mr Bernanke said financial markets and institutions remained under 'considerable stress'. His comments come just two days after the Treasury Department, in close co-ordination with the Federal Reserve, announced measures to help mortgage finance companies Fannie Mae and Freddie Mac, which have been under pressure as the housing market deteriorated.
In its semi-annual monetary policy report to Congress, the Fed raised its projection for US growth in 2008 to a range of 1% to 1.6% from a 0.3% to 1.2% range it forecast in April. The improvement is due to expectations for stronger consumer spending. But the Fed also raised its inflation forecast in the face of costlier energy. It now expects an annual rate of 3.8% to 4.2%, up from the previous 3.15 to 3.4% range.
