Ben Bernanke announced that there will likely be a prolonged continuation of low interest rates. In his speech, Bernanke didn’t veer far from the script, and went back and forth between the risks of prematurely raising rates, and the danger of inflation if they wait too long. The decision, stemming largely from the nation’s ongoing unemployment crisis, gave stocks a lift but dealt another blow to the vulnerable dollar. See the following article from Money Morning for more on this.
Any speculation that U.S. Federal Reserve Chairman Ben Bernanke had his finger on the “exit strategy” trigger has been silenced.
Bernanke yesterday (Wednesday) faced the House Financial Services Committee to instill public confidence in the Fed’s ability to exercise a smooth exit strategy and quell continued fears of a tightening monetary policy.
The Federal Open Market Committee (FOMC) “continues to anticipate that economic conditions — including low rates of resource utilization, subdued inflation trends, and stable inflation expectations — are likely to warrant exceptionally low levels of the Federal Funds rate for an extended period,” he said.
Bernanke cited the struggling job market as the main factor for needing low interest rates. Despite some signs of light – like an increase in manufacturing employment and a rise in temporary-help demand – the official unemployment rate stands at 9.7%, with 40% of the unemployed out of work for six months or more. The effect of long-term unemployment on American consumers is a serious concern to Bernanke and a significant hindrance to regaining economic footing.
The weak job market is delaying a needed reemergence of consumer confidence. The second half of 2009 saw 4% economic growth, but Bernanke noted the contributing factors did not signify permanent repair.
“As the impetus provided by the inventory cycle is temporary, and as the fiscal support for economic growth likely will diminish later this year, a sustained recovery will depend on continued growth in private-sector final demand for goods and services,” said Bernanke.
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The news was far from surprising and Bernanke stayed in line with previous Fed decisions.
“He stuck to the playbook,” said John Canally, an economist with LPL Financial in Boston. “The Fed is trying to back away from its liquidity measures and to reduce its balance sheet somewhat, but the Fed is going [to] keep rates low for an extended period.”
The Fed’s growing balance sheet is just one of the issues that put Bernanke on the defensive.
“Right now, the mood is still mean-spirited,” said Bob Barbera, chief economist at Investment Technology Group. “Wall Street and bonuses and bailouts are still on people’s minds.”
Also on the minds of analysts and investors is last week’s sooner-than-expected discount rate hike that surprised markets and stirred up fear that interest rates would follow before the economy was ready. Bernanke in his testimony reiterated that the discount-rate move was only a winding down of extraordinary measures and would not affect businesses and individuals. Fed-watchers have further calmed interest-rate speculators with predictions that monetary policy tightening won’t occur until at least the second half of 2010.
“It’s important to remember that the Fed adjusts rates based on inflation expectations. And right now, there’s too much slack in the economy for inflation to be an immediate concern.” said Money Morning guest writer Louis Basenese.
Indeed, raising interest rates too soon would send the economy back into a recession, but raising them too late would mean inflation and industry bubbles. Many analysts believe the Fed will be able to keep a lid on rates so long as inflation stays contained.
However, Money Morning Contributing Editor Martin Hutchinson believes the Fed has gone too far and fears that high inflation and a weaker dollar are all but unavoidable.
“The Federal Reserve’s loose monetary policy has put the dollar under duress,” Hutchinson said. “Everything will turn around when central banks start taking monetary policy seriously, and they won’t do that in a hurry. They won’t turn off the money taps until consumer inflation rises.”
The news of low interest rates caused stocks to rally, but the greenback to fall in trading yesterday..
“The fact that Bernanke is not entirely optimistic about U.S. economic recovery and the fact that he did not telegraph additional tightening proves to be disappointing for dollar bulls,” Kathy Lien, director of currency research at Global Forex Trading, told CNNMoney.
The dollar had been up Tuesday following news of lowered consumer confidence.
This article has been republished from Money Morning. You can also view this article at Money Morning, an investment news and analysis site.
