As financial market turmoil intensified on worries of a banking crisis, George Bush and Federal Reserve chairman Ben Bernanke have sought to calm jitters while warning of a bumpy road to economic recovery.
Bernanke said the Federal Reserve lifted its outlook for the US economy in 2008 in a forecast that appears to show no recession.
But he warned of numerous risks including a potentially troublesome rise in inflation and strained financial markets.
The Fed chairman said a "top priority" of the central bank would be to keep financial markets functioning, and that the Fed was paying close attention to the troubles of mortgage giants Fannie Mae and Freddie Mac.
Delivering his semi-annual forecast to Congress, Bernanke indicated that his outlook for better growth and cooling inflation remained subject to a "high degree of uncertainty."
"The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labour market, and rising prices of oil, food, and some other commodities," he said.
Bush meanwhile expressed confidence the country would emerge "stronger than ever before" from its current malaise.
"We're going through a tough time, but our economy is growing, consumers are spending, exports continue increasing and American productivity remains strong," Bush told a news conference.
"We can have confidence in the long-term foundation of our economy, and I believe we will come through this challenge stronger than ever before," he said.
The central bank projected 2008 growth in a range of 1.0 to 1.6 per cent, up from an April projection of 0.3 to 1.2 per cent. The inflation outlook was hotter at 3.8 to 4.2 per cent for overall prices but the outlook for "core" inflation excluding food and energy was unchanged at 2.2 to 2.4 per cent.
Bernanke said the Fed was monitoring the "considerable stress" in financial markets that has affected Fannie Mae and Freddie Mac.
"In general, healthy economic growth depends on well-functioning financial markets," he said.
"Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve."
Bernanke said the US banking system is "well-capitalised" but expressed concerns about banks' ability to keep enough credit flowing to lift economic growth.
The comments came amid deepening worries about the banking system in the wake of the seizure by US regulators of California-based IndyMac, the biggest bank failure in decades, and a horrific slump in shares of many banks.
"Our banking system is well-capitalised," Bernanke told the Senate Banking Committee, where he delivered the Fed's semi-annual economic outlook.
"My concerns have turned more ... on their ability to extend the credit that our economy needs to keep growing."
Treasury Secretary Henry Paulson told the banking committee that as market turmoil continued: "It will take additional time to work through challenges and progress has not come in a straight line."
Paulson said a plan proposed by the administration to offer fresh aid and allow the government to buy equity in troubled mortgage-finance giants Fannie Mae and Freddie Mac would be "important to maintaining financial system and market stability."
Stock markets meanwhile saw a wild ride, with many European bourses tumbling two percent. Wall Street shares swung in both directions before the Dow Jones Industrial Average fell 0.8 per cent, closing below 11,000 for the first time in two years. Freddie Mac tumbled another 26 per cent and Fannie Mae 27 per cent.
Despite Bernanke's efforts to reassure, economist Brian Bethune at Global Insight said: "We get the impression that the Fed is once again underestimating the systemic risk to the financial system, and the economy."
Kevin Giddis, analyst at Morgan Keegan, added that "the financial fear trade, along with weakening economic conditions, is creating a very unsettling environment for a growing number of investors ... this is getting serious and I am not sure who won't be touched and where it will end."
Bernanke said inflation risks remained to the upside while the growth outlook could be revised downward, and reiterated a need to keep inflation expectations in control.
As usual, Bernanke gave no clue on the next move on interest rates after the central bank brought rates down over the past 10 months to 2.0 percent. But he added that the uncertain outlook makes it especially difficult to position monetary policy.
"Given the high degree of uncertainty, monetary policy makers will need to carefully assess incoming information bearing on the outlook for both inflation and growth," he said.
