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Wed, Dec 09, 2009 - Page 10 News List

Bernanke cools rate hike expectations

FRAGILE Unemployment data led investors to ramp up bets that US rates would rise by the middle of next year, lifting the dollar to its biggest gain in nearly a year

REUTERS , WASHINGTON

US Federal Reserve Chairman Ben Bernanke on Monday said the US economy’s recovery remained fragile and unemployment may be high for some time, cooling anticipation of an early increase in US interest rates.

Three days after news of a surprise fall in the US unemployment rate prompted investors to speculate the Fed might move more quickly to raise rates than had been expected, Bernanke said the Fed — the US central bank — was sticking to its pledge to hold benchmark borrowing costs at exceptionally low levels for an “extended period.”

“We still have some ways to go before we can be assured that the recovery will be self-sustaining,” he told the Economic Club of Washington. “Also at issue is whether the recovery will create the large number of jobs that will be needed to materially bring down the unemployment rate.”

A report on Friday showed the US labor market last month turned in its best performance since the economy fell into recession two years ago as the unemployment rate receded slightly from a 26-and-a-half-year high and job losses slowed sharply.

The data led investors to ramp up bets that benchmark US rates would rise by the middle of next year, lifting the dollar to its biggest gain in nearly a year.

However, Bernanke on Monday said Fed officials, who meet next week to debate policy, would bide their time to let the recovery gather strength. His comments drove the dollar and prices for US government bonds lower, while offering temporary support to stocks.

“Right now we are still looking at the extended period given that conditions remain — low rates of [resource] utilization, subdued inflation trends and stable long-term inflation expectations,” he said. “That remains where we are.”

Bernanke said tight credit and the weak job market still posed “formidable headwinds” to recovery, but he said officials would need to consider recent signs that the ­economy was gaining strength at their meeting yesterday and today.

The Fed cut rates to near zero a year ago and has pumped more than US$1 trillion into the economy to battle a deep recession. Now, analysts are beginning to wonder when it will begin to remove its extraordinary support.

Bernanke said that although the Fed would continue to monitor inflation closely, it appears likely to remain subdued for some time and could in fact move lower.

The challenge the Fed faces in withdrawing its massive support for the economy is not how to do it but when, he said.

The central bank has all the tools it needs, and could raise rates even if its balance sheet — swollen by purchases of mortgage-related debt and longer-term Treasury securities — remains large, Bernanke said.

He said the Fed’s ability to pay interest on the reserves banks hold at the Fed would be “an important tool” to push borrowing costs higher, and said there were a number of ways it could withdraw money from the financial system.

“If necessary, we always have the option of reducing the size of our balance sheet by selling some of our securities,” he said.

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