Bernanke Sees U.S. Economy in Balance
Federal Reserve Chairman Ben S. Bernanke on Wednesday presented a benign forecast for the U.S. economy, and markets welcomed his testimony as evidence that the Fed would soon halt its campaign of raising short-term interest rates.
In his semiannual economic assessment to Congress, Bernanke predicted a happy combination of slower but sustainable expansion and gradually moderating inflation.
Growth “should moderate ... both this year and next,” Bernanke told the Senate Banking Committee. “Should that moderation occur as anticipated, it should also help to limit inflation pressures over time.”
The stock market, which had been struggling amid fears of slowing growth and rising geopolitical tensions, responded with a robust rally on strong trading volume. The Dow Jones industrial average gained 212.19 points to close at 11,011.42, its second-best showing of the year. Bond yields fell.
But analysts were not ready to bet the farm. Goldman Sachs economists, for example, advised clients to expect another rate hike when Fed policymakers meet Aug. 8, and perhaps more after that.
Consulting firm Global Insight also predicted at least one more increase.
“We still see clear and growing risks that the Fed will have to do more than that,” said Nigel Gault, the firm’s U.S. economist. “The inflation figures will get worse before they get better, and the Fed may have to do more to keep inflationary expectations in check.”
Bernanke emphasized that “the extent and timing of any additional firming” would depend on the latest inflation data.
As it happened, the latest data came an hour and a half before Bernanke’s testimony, when the Labor Department reported a mixed picture for the June consumer price index. The overall index rose 0.2%, half the level of the month before. But core inflation, which excludes the volatile food and energy sectors, advanced a higher-than-expected 0.3% in June.
Commodity prices held steady after large jumps in the two previous months. But for the 12 months ended in June, the consumer price index rose 4.3% and the core index rose 2.6%. Both are beyond the informal 1.5% to 2.5% “comfort zone” defined by the Fed.
Bernanke acknowledged that inflation had outpaced his previous semiannual forecast, presented in February, his first month on the job after replacing Alan Greenspan. He pointed out that the inflation measure favored by the Fed, personal consumption expenditures, had risen at an annual rate of 4.3% during the first five months of this year.
But much of this increase in prices occurred while the economy was growing at an unsustainable 5.6% rate in the first three months of the year.
Since that time, Bernanke said, economic growth had eased to a pace that would not generate inflation. Consumer spending had slowed, he said, and the housing market had cooled.
Bernanke declined to say whether these numbers would lead to another interest rate increase when the policymaking Federal Open Market Committee meets again.
The panel has raised its benchmark federal funds rate, the interest that banks charge each other for overnight loans, by 0.25 of a percentage point at each of its last 17 meetings, dating to June 2004. The rate, 1% then, is now 5.25%.
But Bernanke made some observations that could be used to support a pause in the rate-raising drive. In particular, he suggested that the recent hikes might not have had enough time to take full effect.
“The lags between policy actions and their effects imply that we must be forward looking....” he said. “We must take account of the possible future effects of previous policy actions -- that is, of policy effects still ‘in the pipeline.’ ”
This stance would guard against overshooting in the campaign to halt inflation. Some analysts worry that the final measures taken before inflation was tamed not only would be unnecessary but would stifle growth.
But Bernanke also warned that inflationary expectations had a way of becoming realities. If the public assumed that the run-up in energy costs, for example, would become embedded in the overall economy, businesses would be less hesitant to raise prices and workers could respond by increasing wage demands, Bernanke said.
Some Democrats on the Senate panel, although welcoming Bernanke’s stated intention not to tighten unnecessarily, took him to task for creating expectations of a rate increase at every Open Market Committee meeting, with a pause considered an exceptional event.
“The Fed has managed to elevate a pause to something that is a pretty major event,” Sen. Paul S. Sarbanes of Maryland said. “What was normal in prior cycles, up or down, is now something that grabs headlines.”
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said Bernanke’s testimony showed that before Wednesday, the markets were overstating the likelihood of another rate increase Aug. 8.
“As he thinks he’ll get the slowdown he wants,” Shepherdson said, “it’s hard to see why Mr. Bernanke would want to hike rates again.”