Little help left for ailing economy

WASHINGTON -- The nation's leaders are running out of answers to America's economic crisis.

The U.S. economic downturn gained steam Tuesday, with a report of the highest inflation since the early 1980s and more bad news for banks. But the Federal Reserve has no more room to move on interest rates, and there's only so much taxpayer money for shoring up the teetering financial sector.

INFLATION: After years of seeming tame, inflation is on the rise. The Labor Department reported Tuesday that soaring costs for gas and food pushed inflation at the wholesale level up by 1.8 percent in June. Over the past 12 months, wholesale prices are up 9.2 percent, the largest year-over-year surge since June 1981.

But the Fed, which usually fights inflation by boosting interest rates, finds itself unable to use that weapon any more. It has pushed rates down to 2 percent from 5.25 percent in response to the housing crisis, and raising them could undermine an economy that is either in recession or growing anemically.

BANKS: Mortgage giants Fannie Mae and Freddie Mac, which hold or guarantee about half the home mortgages in the United States, have lost about 80 percent of their value over the past year. Shares of banks and other financial companies have also been pounded, and some banks have failed or are in danger of failing. On Tuesday, after an analyst warned that Charlotte-based Wachovia's mortgage portfolio will continue to lose value, "seriously jeopardizing" the company's ability to generate earnings, the bank's stock fell to a 17-year low.

During the weekend, Fannie and Freddie were thrown a lifeline by the Treasury Department and the Fed. But with budget deficits swollen from the costs of wars in Iraq and Afghanistan and increased spending on homeland security, there's only so much taxpayer money for bailing out financial institutions.

BETWEEN THE LINES: President Bush and Federal Reserve Chairman Ben Bernanke sought to soothe jittery markets Tuesday and reassure Americans that the U.S. financial system is sound. But they tempered their remarks with warnings and expressions of uncertainty.

Bernanke said that the U.S. economy faces "numerous difficulties," that the outlook for inflation is unclear and that "financial markets and institutions remain under considerable stress."

Bush told a news conference: "The president doesn't have a magic wand." He was answering a question about fuel prices, but his remarks seemed to sum up the government's overall predicament.