Written by Reuters
Wednesday, 22 July 2009 07:43
WASHINGTON: Federal Reserve Chairman Ben Bernanke had on Tuesday, July 21 said the outlook for the long-suffering U.S. economy was improving, but supportive policies would be needed for some time to prevent rising unemployment from undercutting recovery, according to Reuters.
Delivering the Fed's semiannual report on the economy to Congress, Bernanke also sought to dispel concerns the U.S. central bank's aggressive monetary easing could end up fueling inflation, saying he was confident the Fed could pull back its extraordinary stimulus when the time was right.
"Better conditions in financial markets have been accompanied by some improvement in economic prospects," Bernanke told the House of Representatives Financial Services Committee. "Despite these positive signs, the rate of job loss remains high."
While housing and household spending appear to be stabilizing, unemployment is likely to remain uncomfortably high into 2011 and could sap fragile consumer confidence, he warned.
"The (Fed) believes that a highly accommodative stance of monetary policy will be appropriate for an extended period," Bernanke said.
The sober assessment weighed on U.S. stocks, and major indexes were close to flat in midafternoon.
But government bond prices got a lift as Bernanke poured cold water on the idea the Fed might begin to raise rates this year, while also assuring investors policy-makers would not let the inflation genie out of the bottle.
"Bernanke is hitting the right notes in the mind of the market," said Cary Leahey, an economist at Decision Economics in New York. "Bernanke said there's an exit strategy from monetary ease if needed, but he also told Congress he cares about getting the economy back on its feet."
The Fed has cut interest rates to almost zero and doubled the size of its balance sheet to around $2 trillion as it pumped money into the economy to fight a severe recession after a financial panic last year cracked global credit markets.
Some economists have worried that this dramatic expansion of Fed liquidity and lending may have sown the seeds for inflation as the recovery gains traction.
Bernanke, however, said the central bank had an array of weapons at its disposal to withdraw monetary stimulus when the time was right.
"The (Fed) 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 said, echoing comments he made in an article published late Monday on the Wall Street Journal's website.
"We will not allow the broad measures of money circulating in the economy to rise at a rate rapid enough that would cause inflation eventually."
Lawmakers pressed Bernanke on a wide range of issues -- from the economy to regulatory reform to health care -- but in general treated him with far more deference than the last time he testified on Capitol Hill at a hearing on the Fed's role in Bank of America's purchase of Merrill Lynch. - Reuters
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