Federal Reserve Chairman Ben Bernanke told Congress on Wednesday the central bank will again lower interest rates to boost U.S. economy.

"The economic situation has become distinctly less favorable since the time of our July report," Bernanke told the House Financial Services Committee.

Strains in financial markets, which first became evident late last summer, have persisted; and pressures on bank capital and the continued poor functioning of markets for securitized credit have led to tighter credit conditions for many households and businesses, he said.

"Many of the challenges now facing our economy stem from the continuing contraction of the U.S. housing market," said the Fed chief, noting housing starts and sales of new homes are now less than half of their respective peaks, and house prices have flattened or declined in most areas.

He warned the U.S. economy was expected to grow only "sluggishly" in the next few quarters and that the unemployment rate was seen as likely to increase somewhat.

The Federal Reserve projected the U.S. economy to grow between 1.3 percent and 2.0 percent in 2008, down from 2.5 percent to 2.75percent projected last July.

With the economy slowing down further, the unemployment rate is expected to rise to between 5.2 percent to 5.3 percent this year, higher than the Fed's previous forecast rate of 4.9 percent.

"The risks to this outlook remain to the downside," Bernanke stressed, adding the risks include the possibilities that the housing market or labor market may deteriorate more than currently anticipated and that credit conditions may tighten substantially further.

"The FOMC (Federal Open Market Committee) will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Bernanke said.

The Federal Reserve has slashed interest rates to 3 percent from 5.25 percent since mid-September to try to boost the spending and investment, helping bolster the economic growth and calm down the financial market turbulence.

Many economists expect the Fed to cut rates again at a March 18 policy meeting.

At the same time, Bernanke pointed out, the Fed must keep a close eye on inflation given the recent run-up in energy and other prices paid by consumers and businesses.

Consumer price inflation has increased since the summer, in substantial part because of the steep run-up in the price of oil Last year, food prices also increased significantly, and the dollar depreciated, he said.

Reflecting these influences, the price index for personal consumption expenditures (PCE) increased 3.4 percent over the four quarters of 2007, up from 1.9 percent in 2006.

Core price inflation, inflation excluding food and energy prices, also firmed toward the end of the year.

The higher recent readings likely reflected some pass-through of energy costs to the prices of core consumer goods and services as well as the effect of the depreciation of the dollar on import prices, Bernanke noted.

"The further increases in the prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggest slightly greater upside risks to the projections of both overall and core inflation than we saw last month," he warned.

"Should high rates of overall inflation persist, the possibility also exists that inflation expectations could become less well anchored," said the Fed chief.

"Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and could reduce the flexibility of the FOMC to counter shortfalls in growth in the future," he added.

Editor: Yan