Bernanke says U.S. economy back on track after year-end lull
11:09:58 EST Feb 15, 2006
JEANNINE AVERSA
WASHINGTON (AP) - U.S. Federal Reserve chairman Ben Bernanke, delivering his first economic report to Congress, declared Wednesday that the economy has snapped smartly out of an end-of-year lull, although inflation and other risks remain.
He left the door open to higher interest rates in the future. Recent economic barometers on jobs, production, retail sales and other business activity in January "suggests that the economic expansion remains on track," Bernanke told the House Financial Services Committee.
The economy in the final quarter of last year hit a rough patch, growing by an anemic rate of just 1.1 per cent, the slowest in three years, as lingering fallout from Gulf Coast hurricanes and the toll of high energy prices led to belt tightening by consumers and businesses. Most private economists are expecting good growth in the current January-to-March quarter.
High energy prices, a strengthening labour market where unemployment dipped to a 4 1/2-year low, and a solidly growing economy could fan inflation pressures - forces that the Fed will need to keep a close eye on, Bernanke said.
Bernanke, whose first day on the job was Feb. 1, said he agreed with Fed policy-makers' assessment at their Jan. 31 meeting that interest rates may need to move higher. "The Fed judged that some further firming of monetary policy may be necessary, an assessment with which I concur," he said.
At the January meeting, then-Fed chairman Alan Greenspan's last piece of business was to boost a key interest rate to 4.5 per cent, the highest in nearly five years to fend off inflation. It marked the 14th increase since the Fed began to tighten credit in June 2004.
Before Bernanke became Fed chief, Fed policy-makers had differed on how much higher interest rates need to go but still signaled that the nearly two-year rate-raising campaign would probably be drawing to a close this year.
Bernanke said decisions on the future course of interest rates will depend more heavily on what upcoming reports say about economic activity and inflation.
"In coming quarters, the (Fed) will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data," Bernanke said.
His first meeting as Fed chairman to decide interest rates will be March 27-28.
Bernanke, however, made clear that fighting inflation is a crucial Fed mission. "Stable prices promote long-term economic growth by allowing households and firms to make economic decisions," he said. A stable price climate also nurtures employment growth, he said.
While energy prices raise one risk for the economy, another is posed by the future direction of the housing market, Bernanke said.
Although higher energy prices down the road could feed inflation fears, a slowing housing market raises the prospects of crimping consumer spending, which has been an important ingredient to the country's economic health. How these uncertainties play out will be closely watched by the Fed, Bernanke said.
Still, at this point, Bernanke suggested he was hopeful the highflying housing market would make a safe landing by gradually losing altitude.
"A leveling out or a modest softening of housing activity seems more likely than a sharp contraction, although uncertainty attends the outlook for home prices and construction," Bernanke said. "Prices and construction could decelerate more rapidly than currently seems likely."
As part of his testimony, Bernanke also said that the Fed expects the economy to grow at a healthy pace this year of around 3.5 per cent, as measured from the fourth quarter of last year to the fourth quarter of this year. Next year, the economy should grow by around three per cent to 3.5 per cent.
Inflation, excluding food and energy prices, should rise by about two per cent this year and wouldn't exceed that upper bound next year.
The unemployment rate this year and next should be around 4.75 per cent to five per cent, in line with last year's performance.
Michael Oxley, chairman of the House Financial Services Committee, said he was confident Bernanke, 52, will be as successful in his new job as his predecessor, Greenspan, 79, who retired on Jan. 31 after nearly 19 years at the helm.
Democrats, while welcoming Bernanke, expressed concern about the economy's bloated budget and trade deficits and the struggles of working-class families amid high energy prices and health care costs. |
