Wednesday, July 22, 2009

Bernanke sees US upturn, seeks to keep easy credit


WASHINGTON: The Federal Reserve is likely to maintain its easy money policy for some time despite signs of improvement in the economy and financial markets, chairman Ben Bernanke said on Tuesday.

Bernanke, delivering his semi-annual economic report to Congress, cited "notable improvements" in financial markets and a somewhat brighter economic outlook but considerable risks led by high unemployment.

"In light of the substantial economic slack and limited inflation pressures, monetary policy remains focused on fostering economic recovery," Bernanke told the House of Representatives Financial Services Committee.

He added that "a highly accommodative stance of monetary policy will be appropriate for an extended period," suggesting that the Fed is in no hurry to end its near-zero interest rate policy or special programs to pump money into the financial system.

But Bernanke also maintained the Fed was working on a so-called exit strategy to unwind the trillion-dollar effort once a recovery takes root.

He said the the vast effort "can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation."

The policymaking Federal Open Market Committee "has been devoting considerable attention to issues relating to its exit strategy, and we are confident that we have the necessary tools to implement that strategy when appropriate," he added.

He said some of these tools "will unwind automatically as the economy recovers and financial strains ease" because of the premium charged by the Fed for its programs.

In an effort to address concerns that the Fed could create a new financial bubble, Bernanke said the central bank was prepared to act.

"Should economic conditions warrant a tightening of monetary policy before this process of unwinding is complete, we have a number of tools that will enable us to raise market interest rates as needed," he said.

The Fed noted that the it is preparing for a recovery taking root: "When this process has advanced sufficiently, the stance of policy will need to be tightened to prevent inflation from rising above levels consistent with price stability and to keep economic activity near its maximum sustainable level."

Kathy Lien at Global Forex Trading said Bernanke's comments failed to ease financial market jitters, leading to a rise in the dollar.

"Although the Fed chairman talked about exit strategies, his emphasis was on economic risks and this cautiousness did not sit well with currency traders," she said.

Bernanke also delivered the Fed's latest economic projections, which were made public last week, which called for a resumption of growth in the second half of 2009 after a brutal recession.

He commented that financial markets, which had been severely strained at the the time of his last report in February "remain stressed," with credit sometimes difficult to obtain, but that "on net, the past few months have seen some notable improvements."

He added that better conditions in financial markets "have been accompanied by some improvement in economic prospects" including stabilisation of consumer spending and moderation in the housing slump.

But he argued that the Fed would remain focused on adding stimulus to avert a relapse.

"Despite these positive signs, the rate of job loss remains high and the unemployment rate has continued its steep rise," he said.

"Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. The possibility that the recent stabilisation in household spending will prove transient is an important downside risk to the outlook."

The Fed chief also repeated his concerns about a ballooning federal budget deficit that could threaten financial stability.

"Maintaining the confidence of the public and financial markets requires that policymakers begin planning now for the restoration of fiscal balance," he said.

"Agreeing on a sustainable long-run fiscal path now could yield considerable near-term economic benefits in the form of lower long-term interest rates and increased consumer and business confidence. Unless we demonstrate a strong commitment to fiscal sustainability, we risk having neither financial stability nor durable economic growth.

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