Fed Head: Housing Market Decline OK

Ben Bernanke testifies before the Senate Banking Committee on Capitol Hill, Tuesday, Nov. 15, 2005 in Washington, during a confirmation hearing on his nomination to be the next Federal Reserve Board Chairman.
Federal Reserve Chairman Ben Bernanke told Congress on Thursday that the once high-flying housing market appears to be staging a safe landing.

"The downturn in the housing market so far appears to be orderly," he said during a hearing before the House Financial Services Committee.

After five straight years of booming activity, the housing market is slowing as mortgage rates rise and still-high home prices make it difficult for some people to buy.

One of the things that Bernanke and his Fed colleagues are keeping close tabs on is the extent to which a housing slowdown will put a damper on overall economic activity.

"We recognize the risk ... and we are watching it very carefully," he said. Bernanke's appearance was the second in as many days as he gives Congress a semiannual review of the economy. On Wednesday, Bernanke told senators he believes the slowing economy will help keep inflation in check.

The housing market has been a top economic performer. This sector of the economy has racked up record-high sales five years in a row. Rapid appreciation in house prices has made homeowners feel wealthy and has powered consumer spending, helping the economy move solidly ahead.

But the cooling of the housing market is expected to contribute to a slower pace of general business growth across America in the coming months.

The economy, which grew in the first quarter of this year at a 5.6 percent pace, the fastest in 2½ years, is expected to slow to a pace of around 3 percent or less in the second half of this year.

Record-high energy prices are adversely affecting the economy, Bernanke said.

"The increase in energy prices is clearly making the economy worse off both in terms of real activity and in terms of inflation," he said. "There is no question about it."

Oil prices, which hit a new record high of $77.03 a barrel last Friday, have retreated and are currently hovering above $72 a barrel. If oil prices were to rise another $10 or $15 a barrel, there would be "significant consequences" for the economy, the Fed chairman added.

On other matters, Bernanke expressed confidence that the country's resilient economy could withstand any jolt that could come from another natural disaster, such as last year's Gulf Coast hurricanes. But any such disaster would pose a burden on the nation's coffers. "There is no free lunch," he said.