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Fed chairman upbeat on US economy

US Federal Reserve Bank Chairman Ben Bernanke appears at a hearing of the Senate Banking Housing and Urban Affairs Committee in Washington on Wednesday. Bernanke delivered the semi-annual monetary policy report. PHOTO: EPA

Federal Reserve Chairman Ben Bernanke offered an upbeat assessment of the US economy on Wednesday, saying growth is solid despite a slide in housing, while warning that inflation remains a "predominant" concern.

Bernanke, delivering the central bank's semi-annual monetary policy report to a Senate panel, unveiled a forecast for US GDP growth in a range of 2.5 percent to 3 percent for this year.

That is below the 3.4 percent pace last year and a notch down from last year's forecast, but Bernanke said the economy "appears to be making a transition from the rapid rate of expansion over the preceding several years to a more sustainable average pace of growth."

The forecast for next year calls for growth in a range of 2.75 percent to 3 percent.

The upbeat outlook along with the renewed warnings on inflation appeared to suggest Bernanke and his Fed colleagues are not considering rate cuts to stimulate activity and may hike rates later in the year if inflation pressures persist.

The US central bank chief said the economy does not seem to be faltering despite a severe slump in home sales, with consumer spending and other segments of the economy picking up the slack.

"The resilience of consumer spending is all the more striking given the backdrop of the substantial correction in the housing market that became increasingly evident during the spring and summer of last year," he said in remarks prepared for the Senate Banking Committee.

He noted that the problems of the real estate sector "do not seem to have spilled over to any significant extent to other sectors of the economy."

"Overall, the US economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes," Bernanke said.

But he highlighted concerns that inflation may take some time to abate, and that this is the most serious risk for the economy. However, he also noted that Fed policymakers are holding to their forecast for diminishing price pressures, for now.

The Fed's official forecast calls for "core" inflation, excluding food and energy prices, to be in a range of 2 percent to 2.25 percent for this year. That is slightly above what economists see as the Fed's "comfort zone" of under 2 percent.

The forecast calls for next year's core inflation in a more acceptable range of 1.75 percent to 2 percent.

"There are some indications that inflation pressures are beginning to diminish," he said.

But Bernanke said it would be "some time before we can be confident that underlying inflation is moderating as anticipated."

The Fed in August halted a string of 17 consecutive quarter-point interest rate increases, bringing the federal funds rate to 5.25 percent in an effort to stem inflation pressures.

Bernanke noted that last month the central bank's Federal Open Market Committee "again indicated that its predominant policy concern is the risk that inflation will fail to ease as expected and that it is prepared to take action to address inflation risks if developments warrant."

He noted "some tentative signs of stabilization" in the housing market, but said the soft pace of investment "is likely to continue to weigh on economic growth over the next few quarters."

Wall Street shares rallied in response to the remarks. The Dow Jones Industrial Average jumped 0.69 percent to an all-time record of 12,741.86 on what was described as a "market friendly" assessment.

Brian Bethune, an economist at Global Insight, said that Bernanke seemed to signal no immediate rate hike, despite more hawkish comments given by some other Fed officials during the past week.
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