Fed chief predicts economy will rebound despite housing woes

WASHINGTON -- Federal Reserve chairman Ben Bernanke predicted yesterday the economy will rebound from its anemic start of the year even if the housing slump persists. Wall Street slid, taking the news as a sign the Fed won't lower interest rates.

Economic growth in the year's first three months nearly stalled, logging just a 0.6 percent pace. It was the worst quarterly showing in more than four years.

However, Bernanke said he believes some forces that figured prominently in that poor performance -- including a bloated trade deficit, cutbacks by businesses in inventory investment, and weak federal defense spending -- "seem likely to be at least partially reversed in the near term."

Bernanke made his comments via satellite to an international monetary conference in Cape Town . In his talk, he stuck to the Fed's forecast that the economy in coming quarters will advance "at a moderate pace, close to or slightly below the economy's trend rate of expansion."

Some economists put the economy's trend, or normal growth rate, at around 3 percent to 3.25 percent.

On Wall Street, stocks fell as investors took Bernanke's remarks to suggest the Federal Reserve has little reason to lower interest rates any time soon. The Dow Jones, having slid more than 100 points earlier in the session, closed down 80.86 points to 13,595.46.

The Fed meets next on June 27-28 and many economists predict policy makers will again hold a key interest rate steady at 5.25 percent, where it has been for a year.

The Fed chief made clear once again that the painful residential real estate bust, which started last year, "appears likely to remain a drag on economic growth for somewhat longer than previously expected," he said.

But, thus far, the housing market's problems haven't spread through the broader economy in a significant way, Bernanke said.

In fact a report yesterday showed surprising strength in the nation's service economy.

The Institute for Supply Management, based in Tempe, Ariz., said yesterday its index of business activity in the non manufacturing sector registered a faster-than-expected pace of 59.7 in May. The reading was higher than April's reading of 56 and Wall Street's expectation of 56.

A reading above 50 indicates expansion, while one below indicates contraction.

The new orders index was 57.4, up from 55.5 in April. The employment index rose to 54.9 from 51.9.

"The core indexes -- new orders and employment -- are up moderately, and that signals the economy is improving," said Brian Bethune, an economist with Global Insight.

The service industries covered by the ISM report represent about 80 percent of economic activity and span diverse industries including banking, construction, retailing, mining, agriculture, and travel.