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U.S. Is Safe From Deflation, Fed's Bernanke Predicts
By IAIN MCDONALD
DOW JONES NEWSWIRES
TOKYO -- U.S. Federal Reserve Board Governor Ben Bernanke said Saturday that the American economy is safe from a deflation in the short term and the Fed is aiming its monetary policy at stopping the rate of inflation from becoming uncomfortably low.
"There is no immediate threat of deflation in the U.S. economy," he told reporters after speaking to Japan's Association of Monetary Economics conference in Tokyo.
"We want to insure inflation doesn't fall further, not because we fear imminent deflation, but because we want inflation to stay within the appropriate range, which ... in my case is 1% to 2%," he said.
Mr. Bernanke said he is optimistic as a result of supportive monetary and fiscal policy, falling oil prices and strong consumer sentiment and productivity.
The most recent weakening in the dollar against other major currencies "will be a modest benefit to the U.S. economy in the remainder of the year," he added.
Mr. Bernanke said he himself expects U.S. economic growth of 3%, possibly 3.5%, in the second half of 2003 and close to 4% in 2004. Mr. Bernanke's personal forecasts are above those given previously by the Fed, which has said it expects real GDP growth of 2.8% over the four quarters of 2003.
Mr. Bernanke said that while there is no immediate threat of deflation in the U.S. economy, monetary policy is aimed at stopping inflation from falling further.
And while conditions are in place for the economy to recover, there aren't yet any signs that companies will take on more workers and boost investment.
He also said the recent depreciation of the dollar against other major currencies will give a modest boost to the economy and he implied that the dollar's exchange rate falls were already factored into the Federal Open Market Committee's latest policy decision.
Mr. Bernanke's remarks, don't strongly indicate his policy leaning, but imply the Fed is on high alert and ready to act to stem further falls in the inflation rate.
After its latest meeting on May 6, the FOMC said in a statement that inflation might become too low. Mr. Bernanke said that comment "was interpreted by some in the press as a concern about deflation."
"But actually ... there is no immediate threat of deflation in the U.S. economy," he said. "Rather, our concern was that inflation, while positive, might become uncomfortably low."
Mr. Bernanke said he considers "inflation in the range of 1% to 2% ... to be the appropriate range for inflation and I would be uncomfortable with inflation below 1%."
In particular, there is a risk that the core personal consumption expenditure deflator -- an indicator closely watched by the Fed, could slip below 1% over the next year given unused capacity in the economy, he said.
Such a fall "would bring us closer to a range in which deflation might become a more likely probability," Mr. Bernanke added.
The PCE price index was up just 1.3% in April, the lowest rate since 1963.
For policy, given risks are skewed toward a fall in inflation and all else being equal, "we want to ensure that inflation doesn't fall further, not because we fear imminent deflation, but because we want to make sure inflation stays within the appropriate range," he said.
"Month-to-month changes in prices are very, very noisy and subject to special factors so we would be very unlikely to put heavy weight on a month-to-month change," he said. "We tend to look at longer-range averages and also our forecasts."
Speaking more generally, Mr. Bernanke stressed the importance of acting preemptively to prevent deflation.
"You should be very preemptive and attack early and make sure the economy doesn't weaken to the point where prices are falling," he said. "Our approach is to try to be very foresighted and try to take action well in advance of any real deflationary threat."
"We take it very seriously," he added.
On the economy, Mr. Bernanke said he is optimistic given supportive monetary and fiscal policy, falling oil prices and increases in consumer sentiment and productivity. He expects U.S. economic growth of 3%, possibly 3.5%, in the second half of 2003 and close to 4% real growth in 2004.
"That is conditional, however, on there being some recovery in capital expenditures and business hiring," he added. "That hasn't been fully demonstrated in the data although we are expecting and hoping that will begin to be seen."
"It's a question of how strong the recovery will be, not whether there will be a recovery," he said.
The central bank policy maker said falls this year in the value of the dollar will help the U.S. economy but he implied it wouldn't have a significant impact on policy.
"The depreciation will be a modest benefit to the U.S. recovery in the remainder of the year," he said.
Mr. Bernanke indicated he thought heavy intervention in foreign exchange markets by Japan's authorities to stem the yen's gains versus the dollar will have only a temporary effect on the exchange rate and be of little benefit to the economy.
Data issued by the Bank of Japan Friday indicate Japan spent a record ¥3.983 trillion to stop the dollar falling sharply against the yen in May.
The intervention appears so far to have been successful, stopping the dollar from falling below ¥115. Late Friday in New York, the dollar was trading at ¥119.35.
Asked by reporters to comment on the intervention, Mr. Bernanke said "most studies find that currency intervention doesn't have long life effects either on the currency or domestic economic conditions."
Japan wants to stop the yen appreciating, fearing it will hurt exports and add to already strong deflationary pressures in Japan's economy.
But in a speech to Japan's Association of Monetary Economics, Mr. Bernanke said the best way for Japan to end deflation is for the Bank of Japan and government to temporarily coordinate policy and aggressively ease policy settings.
He said the BOJ should agree to buy a large amount of Japanese government bonds to help the government fund large tax cuts to consumers and businesses to jump start the economy.
Write to Iain McDonald at iain.mcdonald@dowjones.com
Updated May 31, 2003 8:53 a.m.
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