WASHINGTON - UNITED States Federal Reserve chairman Ben Bernanke said the US housing market is in a 'substantial correction'.
This will lop about a percentage point off economic growth in the second half and restrain the expansion next year, he added.
US stocks rallied, after figures released on Wednesday showed that the biggest part of the economy slowed and after
Mr Bernanke acknowledged a housing slump. Both events encouraged speculation that benchmark interest rates may decline next year.
The Standard & Poor's 500 Index set a five-year high and the Dow Jones Industrial Average climbed 123.27 points, or 1.1 per cent, above 11,800 for the first time.
The Fed chairman also said in response to questions after a speech that the central bank remains 'concerned about inflation' because it remains above 'what we would consider price stability'.
'There is currently a substantial correction in the housing market,' Mr Bernanke said. The decline in residential housing construction is one of the 'major drags that are causing the economy to slow', he added.
He 'broadcast the fact that the Fed is not interested in raising rates from here on out', said Mr Michael Farr, president and founder of Farr, Miller & Washington.
Financial markets now expect the Fed to keep benchmark overnight interest rates unchanged at its next meeting on Oct 24-25 and through the end of the year, but believe there is some chance policymakers could lower rates next year.
The Fed held rates steady at 5.25 per cent at its meeting on Sept 20. At its previous meeting in August, the Fed decided to stay put, breaking a string of 17 consecutive rate increases over a period of more than two years.
Also on Wednesday, Fed vice-chairman Donald Kohn said US price pressures look set to ease as economic growth settles at a comfortable pace. But he added that uncertainties abound and the Fed must remain 'vigilant' on inflation.
'To some, this story of a 'soft landing' seems too good to be true,' he said.
'My view is that this economy is capable of generating the type of favourable outcome that I have just sketched, but as in any period of transition, policymakers must be aware of heightened risks on all sides of the forecast,' he said.
BLOOMBERG NEWS, REUTERS
