As President Bush sought to reassure Americans about the state of the economy, the Federal Reserve chairman today painted a considerably bleaker picture and the U.S. treasury secretary urged Congress to pass a mortgage assistance plan that, thus far, has no price tag.
Bush, speaking at a White House news conference this morning, said that the nation's financial system is "basically sound."
"I understand there's a lot of nervousness, but the economy is growing," the president said. "Productivity is high. Trade's up. People are working — it's not as good as we'd like. And to the extent that we'll find weakness, we'll move."
Bush's comments didn't bolster stocks today. The Dow Jones Industrial Average closed down more than 90 points, falling below 11,000 for the first time since July 21, 2006.
Earlier in the day, Federal Reserve Chairman Bernanke conceded before the Senate committee that the economy continues to flounder and inflation continues to grow despite steps taken by the Fed to shore up financial institutions and encourage spending.
The Fed's decision to allow investment banks access to low-interest loans and its repeated cuts to the key federal funds rate "have had positive effects," Bernanke said in testimony before the Senate Banking, Housing and Urban Affairs Committee.
But, he said, "the economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food and some other commodities."
Bernanke's testimony comes as investors and consumers grapple with a glut of discouraging economic news. In recent days, shares of Fannie Mae and Freddie Mac plummeted as investors reacted to concerns that the government-sponsored companies may not have enough capital to cover losses stemming from the nation's ailing mortgage market.
The government's assurances Sunday night that the Federal Reserve and the Treasury Department would lend money to Fannie and Freddie, if necessary, did not stop the stocks' declines.
Other financial institutions have also suffered: California-based IndyMac's failed mortgage business forced government regulators to shut down the bank Friday. This week, share values for Washington Mutual, Wachovia and other banks saw double-digit percentage drops as Wall Street steeled itself for bank earnings reports due later this week.
Broader economic indicators offered no relief: The Labor Department reported this morning that wholesale prices in particular, skyrocketing prices for gas and food registered a 9.2 percent increase in the past 12 months, the largest jump in 27 years. Meanwhile, retail sales grew by only 1 percent, a weaker-than-expected result largely attributed to a 3.3 percent decline in sales at auto dealerships, according to the Commerce Department.
Bernanke said inflation would likely continue to move higher, temporarily, due to rising energy prices.
The overall high rate of inflation, he said, was due to the run-up in prices in oil and also other commodities, such as metals and certain crops. The Fed's "best judgment," he said, was that growing worldwide demand was responsible for the sharp rise in oil prices. The decline in the value of the dollar, he said, has "contributed somewhat" to the increase.