Ben Bernanke, the Chairman of the US Federal Reserve, said yesterday that America’s housing downturn was set to steepen and slow the economy for longer than had been thought.

However, he reassured markets by emphasising that the woes of the construction and mortgage sectors were unlikely to spread to the wider financial system. The American economy would rebound from its weak pace in the first quarter of the year, he said.

In a speech delivered by satellite to the International Monetary Conference in South Africa, Mr Bernanke said that weakness was likely to persist in the nonprime mortgage market, which has suffered a dramatic rise in defaults.

“The tightening of terms and standards now in train may well lead to some further contraction in nonprime originations in the period ahead,” he said. “We are also likely to see further increases in delinquencies and foreclosures this year and next.’’ Mr Bernanke said that the most recent data showed that demand for housing was continuing to fall and that house price inflation, which slowed sharply last year, remained soft.

He said: “The adjustment in the housing sector is ongoing and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than expected.”

However, Mr Bernanke stuck to the Fed’s forecast that the American economy, which grew at an annual rate of just 0.6 per cent in the first quarter, would expand “at a moderate pace” in the months ahead. He said that some of the forces that had held back growth in the first quarter, such as cutbacks by businesses in inventory investment, low defence spending and the trade deficit, were likely to be at least partly reversed.

Mr Bernanke’s speech came as a leading survey delivered some upbeat news on the US service sector. The headline gauge of activity on the Institute of Supply Management’s nonmanufacturing survey rose to 59.7 in May from 56 the month before, on a scale where any figure above 50 indicates expansion. The figure was ahead of expectations.

The Fed’s Open Markets Committee meets at the end of the month, when it is widely predicted to hold interest rates steady at 5.25 per cent, as it has done for a year.

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