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Ben Bernanke, chairman of the Federal Reserve, downgraded his expectations for US economic growth and warned that the rapid productivity growth of the internet era may be slowing, as he began two days of testimony on Capitol Hill.
The twice-yearly testimony is closely watched by financial markets for clues as to the likely direction of interest rates, but the characteristically cautious tone of Mr Bernanke's answers only cemented the view that rates are set to remain on hold for the foreseeable future.
The Fed has already held rates steady for eight months.
While inflation remains the number one concern for the Fed, Mr Bernanke said, food and energy price rises are likely to ease in the medium-term and the weak housing market is cooling the economy.
The Fed lowered its 2008 GDP growth forecast to between 2.5 per cent and 2.75 per cent from its February forecast of between 2.75 per cent and 3 per cent.
It also lowered its 2007 GDP forecast, as Mr Bernanke warned that the housing market has not yet bottomed out.
Nonetheless, the Fed kept its estimates of core inflation intact, where many Wall Street economists believed they could be lowered, and Mr Bernanke warned that productivity improvements may be slowing - a fact that would put upward pressure on inflation.
"The combination of moderate gains in output and solid advances in employment implies that recent increases in labour productivity have been modest by the standards of the past decade," he told members of the House of Representatives.
"The cooling of productivity growth in recent quarters is likely the result of cyclical or other temporary factors, but the underlying pace of productivity gains may also have slowed somewhat."Mr Bernanke also said that recent signs of moderating inflation may only be temporary, effectively ruling out an early interest rate cut.
- INDEPENDENT
