US mortgage firms Fannie Mae and Freddie Mac are not at risk of collapse, Federal Reserve chairman Ben Bernanke has insisted.

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Shares in the two firms rebounded slightly on Wednesday, although doubts still surround their long-term future.

Fighting inflation, now rising at its fastest pace in 26 years, had become a top priority, the Fed boss added.

Mortgage crunch

In the second day of his semi-annual testimony to Congress, Mr Bernanke sought to allay fears that Fannie Mae and Freddie Mac, which between them guarantee nearly half of US mortgage debt, might run out of cash.

Policymakers have always insisted the two firms are adequately capitalised, but the US Treasury announced plans on Sunday to supply them with additional credit and buy shares in the firms, if needed.

This was not enough to stabilise the firm's shares, which fell a further 17% on Tuesday on fears that investors may lose out in the event of a government rescue.

But on Wednesday, their shares rose 11% amid a general rally in the banking sector, after regulators vowed to crack down on the practice of "short-selling" shares.

President Bush has defended the plans to help Fannie Mae and Freddie Mac, but denied they were being bailed out.

He said the importance of the firms to the US economy meant there was a "special need" to help them to ensure confidence and stability in the mortgage market.

However, he has stressed that the two firms should remain shareholder-owned.

Bleak backdrop

Mr Bernanke's Congressional appearance comes against a bleak economic backdrop, with economic growth slowing and inflation rising.

Consumer prices rose 1.1% on a monthly basis in June, more sharply than expected.

Their climb, driven by soaring fuel prices, makes it far harder for the Fed to consider cutting borrowing again to counter the fear of a recession.

"It's a top priority of the Federal Reserve to run a policy that is going to bring inflation to a acceptable level consistent with price stability," Mr Bernanke said.

Recent figures have shown the impact of the housing slump and credit crunch on consumer confidence, with retail sales virtually flat last month.

With consumer spending accounting for nearly two-thirds of overall economic output, analysts believe growth could be minimal in the second half of 2008.

But there was also better news on Wednesday, with data indicating that the manufacturing sector remains resilient.

Industrial production rose by 0.5% last month, the best performance for nearly a year and a reversal of two previous months of decline.

(BBC)

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