Ben S. Bernanke

Federal Reserve Chairman Ben S. Bernanke said the U.S. economy is likely to "slow noticeably" this quarter while high commodity prices and a weaker dollar may stoke inflation "for a time."

Bernanke said the Federal Open Market Committee, which sets the benchmark U.S. interest rate, saw risks to both growth and prices at its Oct. 31 meeting, when officials reduced the rate by a quarter-point to 4.5 percent. He added the Fed "will be very dependent on the data" and "will respond as needed" to keep growth and inflation stable.

"The committee expected that the growth of economic activity would slow noticeably in the fourth quarter," Bernanke said in testimony to the congressional Joint Economic Committee. While the FOMC anticipated growth to improve later next year, "the committee also saw downside risks to this projection" if the housing slump spilled into spending, he said.

The 53-year-old Fed chief is fighting on several fronts to maintain stable markets, keep the six-year economic expansion going and contain inflation expectations. Officials cut interest rates twice in the past two months, while signaling in the Oct. 31 statement they are reluctant to lower borrowing costs further.

"The Federal Reserve is stuck," said Allen Sinai, president of Decision Economics Inc. in New York. "If the inflation risk wasn't there, then the prospects for the economy suggest much lower interest rates."

The inflation outlook was "subject to important upside risks" from prices of crude oil and other commodities and the weaker dollar, Bernanke said. "These factors were likely to increase overall inflation in the short run and, should inflation expectations become unmoored, had the potential to boost inflation in the longer run as well."

Bernanke's first full hearing on the economic outlook since July was marked by increased concern from lawmakers about the economy and criticism of the Fed's approach to the collapse in subprime mortgages, even as legislators praised the central bank for cutting interest rates.

Senator Charles Schumer, the New York Democrat who chairs the panel, criticized the Fed for not "acting quickly or boldly enough" to handle the risks in the housing and credit markets. Representative Jim Saxton of New Jersey, the committee's ranking Republican, noted that there are "troubling indicators" of economic performance as well as positive ones.

Mortgage defaults and delinquencies, which officials expect to worsen, continue to roil financial markets, causing investors to retreat from risk. Banks have tightened lending standards, which may pose a threat to spending.

Recent economic reports "suggest the overall economy remained resilient in recent months," Bernanke said. "However, financial market volatility and strains have persisted."

Household spending is likely to grow more slowly as tighter credit, weaker home prices and higher energy prices damp sentiment, he said.

Fed officials are trying to cushion the economy from eroding housing markets, without pushing interest rates to a level that would reignite inflation. Financial markets reflect both growth and inflation concerns.

Gold, a traditional hedge against rising consumer prices, rose to the highest level since 1980 earlier this week. Crude oil prices posted record highs in New York trading this week; the dollar also hit an all-time low this week.