By Mark Felsenthal
WASHINGTON (Reuters) - Federal Reserve Chairman BenBernanke told a House of Representatives panel on Wednesday atop Fed priority is restoring financial calm even as "too high"inflation and weak growth threaten the economy.
Bernanke, who spoke on the second of two days of semiannualmonetary policy testimony, faces some congressional scepticismabout a plan to backstop embattled mortgage finance enterprisesFannie Mae and Freddie Mac. The two companies own or guaranteealmost half of all U.S. mortgages and policy-makers considerthem vital to any recovery of the beleaguered U.S. housingmarket.
Rep. Spencer Bachus, the highest ranking Republican on theHouse Financial Services Committee, said taxpayers should notbe on the hook for losses incurred by publicly tradedcompanies.
Bachus said he was concerned about an approach "whereinvestors reap market gains and taxpayers are stuck with thelosses." His concerns echoed those expressed by severalSenators on Tuesday, raising questions about how quickly theadministration can push its package of confidence-boostingmeasures announced Sunday through Congress.
"Government and ultimately taxpayers should not assumeresponsibility for losses or indemnify private investors,"Bachus said at the panel hearing.
Bernanke for the second day said the economy faces "seriousdifficulties," and described strains from the deep housingslump, tight credit, and soaring energy and commodity prices.
At the same time as growth falters, Bernanke is underpressure both within and outside the Fed for not fightinginflation more aggressively with higher benchmark interestrates, which stand at 2 percent. However, the Fed chairman toldlawmakers on Wednesday there are "significant downside risks"to the outlook for growth, suggesting the central bank isunlikely to raise rates at its August meeting.
However, fresh evidence of inflationary pressures surfacedin a government report on Wednesday that showed consumer pricesrose in June by the biggest amount since September 2005 in theaftermath of Hurricane Katrina, as gasoline prices surged.
Even when volatile food and energy costs were stripped out,consumer prices rose more than expected.
Bernanke told lawmakers that he agrees inflation is toohigh.
"It's a top priority of the Federal Reserve to run a policythat is going to bring inflation to a acceptable levelconsistent with price stability," he said in response toquestions from members of the committee.
At the same time, higher oil prices are likely to forceconsumers and businesses to adapt, Bernanke said.
"The only silver lining to these high prices is they inducelots of incentives to conserve, incentives to providealternatives, incentives to find and develop other oilsources," he told the panel.
Challenges to the economy from record-high oil prices havebeen overshadowed in recent days by worries that mortgagebuyers Fannie Mae and Freddie Mac might not have enough capitalto withstand the sharp housing downturn. After the companies'share prices tumbled last week, Treasury Secretary HenryPaulson announced plans to seek authority from Capitol Hill tolend more extensively to the companies and buy equity capitalif necessary.
Bernanke told lawmakers on Wednesday the companies areadequately capitalized and are not in danger of failing.
The Fed opened discount window borrowing to the companiesas an immediate backstop until lawmakers approve Paulson'sproposal, which is aimed at reassuring investors the U.S.government stands squarely behind the congressionally charteredbut privately held firms.
However, on Tuesday, some members of the Senate expresseddiscomfort at approving unlimited lending to the two companies,suggesting Congress will seek to reshape the Paulson proposal.
(Reporting by Mark Felsenthal; Editing by Andrea Ricci)
