Federal Reserve Chairman Ben Bernanke said on Wednesday that housing market turmoil has clouded the outlook for the US economy but the central bank remains focused on ensuring core inflation moves lower.

In testimony to the congressional Joint Economic Committee, Bernanke said inflation, outside of volatile food and energy prices, was likely to moderate gradually, but it was higher than the Fed would like and might not move down as hoped.

"Our policy is still oriented toward control of inflation, which we consider to be at this time to be the greater risk," he said.

However, Bernanke also said the slowdown in the US housing market, the principal source of a deceleration in economic growth that began last spring, has the potential to derail growth.

"The near-term prospects for the housing market remain uncertain," he said, adding that developments in the subprime mortgage market, which caters to borrowers with weak credit histories, could stand in the way of a housing recovery.

Stocks slip

Stocks fell as Bernanke's comments about risks in the housing market helped push the Dow Jones industrial average down nearly 100 points on the day, while prices for longer-dated debt securities also slid in response to the Fed chairman's caution about inflation.

Bernanke's emphasis on prices, even as he acknowledged risks to the Fed's outlook for growth, comes a week after the Fed dropped a reference to possible interest rate rises from a policy-setting meeting statement, replacing it instead with a vaguer reference to "future policy adjustments".

The Fed held benchmark overnight borrowing costs steady at 5.25 percent and said inflation was its top concern. Still, many in financial markets took the shift as a sign the Fed was acknowledging that growth worries and might cut interest rates within months.

The Fed chief said the Fed has not abandoned its penchant toward concerns about inflation.

When asked about the language shift, Bernanke said: "Uncertainties have risen and therefore a little more flexibility might be more desirable."

Despite this heightened uncertainty, Bernanke said the Fed believes the economy was still likely to expand at a moderate pace over coming quarters, but the Fed's forecast was subject to a number of risks.

"To the downside, the correction in the housing market could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector," he said.

Bernanke warned of possible spillover from housing sector woes to employment and consumer spending, and raised the possibility that recent weakness in business spending could persist.