By Mark Felsenthal
WASHINGTON (Reuters) - Federal Reserve Chairman BenBernanke told a House of Representatives panel on Wednesdaythat fighting inflation is a top priority and acknowledged thatmost Americans feel the economy is in recession-likeconditions.
"This is clearly a rough time," he said in response toquestions from lawmakers. "Conditions are tough on averagefamilies," he added.
The Fed chairman also emphasized the importance of sendinga strong signal to financial markets that the U.S. governmentstands behind embattled mortgage finance companies Fannie Maeand Freddie Mac.
On the second day of two days of congressional testimony,Bernanke faced renewed congressional scepticism about a plan tobackstop the companies, which own or guarantee almost half ofall U.S. mortgages and are considered vital to any recovery ofthe beleaguered housing market.
PUBLIC PAIN, PRIVATE GAIN
Rep. Spencer Bachus, the highest ranking Republican on theHouse Financial Services Committee, told Bernanke that U.S.taxpayers should not be on the hook for losses incurred bypublicly-traded companies.
Bachus said he was concerned about an approach "whereinvestors reap market gains and taxpayers are stuck with thelosses."
"Government and ultimately taxpayers should not assumeresponsibility for losses or indemnify private investors,"Bachus said at the panel hearing.
His concerns echoed those expressed by several Senators onTuesday, raising questions about how quickly the administrationcan push its package of confidence-boosting measures announcedSunday through Congress.
Bernanke reiterated that curing the housing sector's woeswas critical to getting growth onto a better track and urgedlawmakers to quickly approve measures aimed at reassuringmarkets that the congressionally chartered but privately heldmortgage finance providers are not in any financial peril.
"We need to restore that confidence so they can have thefinancial strength they need to not only be solvent, which theyare, but to go ahead and to be more proactive in strengtheningour mortgage markets," the Fed chair said.
On top of troubled financial markets, Bernanke said theeconomy has been buffeted by the housing downturn, tight creditand high energy and commodity prices.
Bernanke is under pressure both within and outside the Fedfor not fighting inflation more aggressively with higherbenchmark interest rates, which stand at 2 percent.
But the Fed chairman raised his level of concern about theeconomy on Tuesday and Wednesday, saying there are "significantdownside risks" to the outlook for growth. His remarkssuggested the central bank is unlikely to raise rates at itsAugust meeting.
INFLATION A TOP PRIORITY
But fresh evidence of inflationary pressures surfaced in agovernment report on Wednesday showing consumer prices rose inJune 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 assured lawmakers that inflation is a concern forthe central bank.
"Inflation is currently too high," Bernanke said. "And it'sa top priority of the Federal Reserve to run a policy that isgoing to bring inflation to a acceptable level consistent withprice stability," he said in response to questions from thecommittee.
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.
The economic pain of record-high oil prices have beenovershadowed in recent days by worries that Fannie Mae andFreddie Mac might not have enough capital to withstand thesharp housing downturn.
After their share prices tumbled last week, TreasurySecretary Henry Paulson announced plans to seek authority fromCapitol Hill to lend more extensively to the companies and buyequity capital if 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,Gary Crosse)
