updated 3/28/2007 1:48:15 PM ET 2007-03-28T17:48:15

Federal Reserve Chairman Ben Bernanke told Congress on Wednesday he doesn’t believe the economy will slip into a recession and rejected the notion raised by his predecessor, Alan Greenspan, that the economic expansion, which started in late 2001, could be running out of steam.

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“I would make a point, there seems to be a sense that expansions die of old age. ... I don’t think the evidence supports that,” Bernanke said in testimony to Congress’ Joint Economic Committee.

Bernanke also explained that last week’s change in the Federal Reserve’s policy statement, which hints of future rate moves, was done to achieve more leeway. “We are looking for a bit more flexibility,” he explained.

“The risks had increased on both sides,” Bernanke said, referring to both the increased threat of higher inflation on the one hand and weaker-than-expected economic growth, on the other.

Last week the Fed again held a key interest rate steady at 5.25 percent, which hasn’t budged since August. But the Fed also said there was a possibility that rates could go down or up. Previous policy statements had spoken only of the possibility of rate increases. Wall Street rallied last week on the new language, interpreting it as suggesting the possibility of a rate cut.

The direction of rates, the Fed said at the time, hinges on what incoming barometers say about the economy and inflation. Bernanke repeated that point on Wednesday.

“I do want to emphasize we have not shifted away from an inflation bias, “ Bernanke said.

Stocks dropped sharply Wednesday in response to Bernanke’s comments.

On another topic, Bernanke said the growing troubles in the market for risky mortgages thus far doesn’t appear to be spreading to the overall economy. “At this juncture ... the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained,” he said.

It marked Bernanke’s most extensive discussion yet of the mounting problems in the risky mortgage market. Those troubles raise “some additional questions about the housing sector,” which has been mired in a deep slump for more than a year, Bernanke said.

Fallout in the risky mortgage market is clobbering some lenders and homeowners and has stoked concerns on Wall Street, Capitol Hill and elsewhere.

So-called “subprime” lenders who make home loans to people with blemished credit histories or low incomes have been battered. Weak home prices and rising interest rates have made it increasingly difficult for borrowers to keep up with their payments. Delinquencies and foreclosures in the subprime mortgage market are soaring.

“Although the turmoil in the subprime mortgage market has created financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear,” Bernanke said.

The crumbling housing market has been a major factor behind the slowdown in the U.S. economy. Bernanke said the “near-term prospects for the housing market remain uncertain.”

Even so, Bernanke stuck with the Federal Reserve’s assessment that the economy is likely to grow at a moderate pace over the coming quarters. He also repeated the Fed’s belief that inflation also should ease in the months ahead, but he warned that underlying inflation remains “uncomfortably high.”

To be sure, Bernanke was careful to hedge the Fed’s economic bets. The housing slump could turn out to be worse than expected, perhaps exacerbated by problems in the market for risky mortgages, he said. Recent weakness in business investment also could persist, he added. Those forces could further dampen economic growth.

On the other hand, consumers, who proved “quite resilient” despite the housing slump and increases in energy prices, could continue to keep spending at a pace that would make the economy grow faster than currently expected, he said. And, there are other forces, including a still-good jobs market that is producing fatter paychecks, that could push up inflation.

The Fed chief’s testimony comes amid fresh questions about the country’s economic health, given problems with subprime mortgages, stock market turbulence and worries about the severity of the housing slump.

Against this backdrop, Sen. Charles Schumer, D-N.Y., chairman of the Joint Economic Committee, and some other lawmakers said the Fed should be open to cutting interest rates.

“Another reason to be open to an easing of monetary policy is the concern that the housing market adjustment is far from over,” Schumer said. “Recent housing data has offered little encouragement that the market might be stabilizing. So it is still too early to tell if the worst is over for the housing market,” he added.

There are some fears that consumers — whose confidence is sagging — and businesses could clamp down on spending and investing, thus short-circuiting overall economic growth. Rising prices for gasoline and other items also are raising concerns about inflation. These economic crosscurrents can complicate the Fed’s job of trying to keep the economy and inflation on an even keel.

Just hours before Bernanke testified, the government reported that new orders for costly manufactured goods staged a modest rebound in February after a sharp slide the month before that jarred investors.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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