The Fed Chairman predicts a gradual improvement in the US economy over the next two years, but warns of “considerable uncertainty” over the outlook.
With a plunging stock market, rising inflation, and the U.S. financial system on edge, what other time would be the best time for Federal Reserve Chairman Ben Bernanke to deliver his semiannual testimony to Congress on the American economy? In his July 15 testimony to the Senate Banking Committee, the Fed chief noted that inflation risk to the US economy has intensified, but also pointed to the risks of slowing growth.
He said he expects the US economy to gradually improve over the next two years, thanks to a “slow” end to the housing crisis and gradually improving credit conditions. But he warned that “considerable uncertainty” surrounds that outlook. He said the US economy faces “numerous challenges,” and said these risks remain his top priority. He noted an unusually uncertain inflation outlook, and said the Fed is watching for signs that show rising commodity prices are factoring into wages.
Bernanke noted that “accurate and appropriate assessment of risks to the outlook for growth and inflation is a significant challenge for monetary policymakers.”
Searching for signals about rates
“Overall, while there is no clear indication of when the Federal Open Market Committee might start raising rates, given the risks of slowing growth and rising turmoil in financial markets, it doesn’t look like there will be a rate hike in the near future,” wrote Beth Ann Bovino, senior economist at Standard & Poor’s in a note dated July 15, 2008.
“The Fed continues to play down the risks of a sustained pick-up in inflation … and suggests there is headwind to a rate hike in the second half of the year,” writes economist John Ryding. of RDQ economics in New York. “In particular, Bernanke’s testimony suggests that the Fed is counting on containing domestic wage increases to limit underlying inflation.”
“There’s no telling the Fed won’t backtrack on some of its assertions by year-end, especially given upward revisions to the inflation outlook along the way,” the economists wrote. ‘ action economics in an article published on their website.
In the question-and-answer session that followed his address to lawmakers, Bernanke said the central issue Congress should address is the real estate market. He said that the uncertainty on the prices of real estate and housing is largely at the root of the tensions in the financial market, tensions which have an impact on the economy.
Bernanke on banks
On other issues, Bernanke said he is still trying to assess the impact of the current tax package. Regarding gas and energy prices in the market speculation, he said the Fed is looking at a wide range of transparency issues. Bernanke asked senators to be careful about legislating against speculation. He said he would not consider speculation or manipulation to have been a “significant reason” for the rise in oil prices. He warned against any action that could hinder or prevent futures markets from playing their legitimate role as providers of liquidity and acting as a means of hedging.
Bernanke said the bankruptcy of IndyMac Bank, which was placed in a conservatorship by regulators on July 11, 2008, was due to the poor quality of the bank’s assets, particularly weighted by subprime mortgages and other mortgages. He said that in general, banks enter the credit crunch period well capitalized. His concerns have centered more on banks’ ability to lend, and less on solvency issues.
Regarding the government-rescued Freddie Mac (FRE) and Fannie Mae (FNM) companies, Bernanke said the Fed’s goal is to protect the financial system, as well as taxpayers, and these kinds of strong actions in favor of the banks is a necessity, it is what makes it possible to restore confidence in the system.