US Federal Reserve Chairman Ben Bernanke signaled that the US central bank was not yet ready to abandon its ultra-low interest rates as it tried to keep a tentative economic recovery on track.
The Fed chairman, in his semiannual report to Congress on Wednesday, said he saw unemployment remaining stubbornly high, which would require the Fed to stay on a stimulative path, doing little to change monetary policy.
The report came after last week’s surprise increase in the discount rate for emergency bank loans prompted speculation that the Fed might be moving faster than anticipated to a tighter monetary stand.
In the House of Representatives Financial Services Committee, Bernanke said the economy had begun to show growth in the second half of last year after a massive stimulus effort from the Fed and the US government.
But he said the recovery “probably will be tempered by households’ desire to rebuild wealth, still-tight credit conditions facing some borrowers, and, despite some tentative signs of stabilization, continued weakness in labor markets.”
Because of these headwinds, Bernanke said that economic conditions are “likely to warrant exceptionally low levels of the federal funds rate for an extended period,” repeating a key phrase used by the central bank.
Bernanke was to appear for a second day of testimony on the report before the Senate Banking Committee yesterday.
The Fed has kept its base rate in a range of zero to 0.25 percent for more than a year as part of massive effort to spark recovery. A variety of other programs to restore credit flows are gradually being wound down.
The central raised its discount rate for emergency bank loans a quarter point last Friday but indicated that this was not a sign of tightening of overall policy.
The market focus on the Fed chief’s remarks overshadowed an unexpected drop in new home sales last month to a record low. Stocks rallied while the dollar fell.
Sales plunged 11.2 percent to a seasonally adjusted annual rate of 309,000, from a revised December rate of 348,000, the US Commerce Department said in a fresh sign of weakness in the troubled housing market.
The third consecutive month of declining sales surprised most analysts who had expected sales to increase to 354,000.
“Dollar bulls were sorely disappointed by Bernanke’s comments,” said Kathy Lien at Global Forex Trading.
“At minimum, traders wanted to hear optimism from the Fed Chairman but unfortunately his comments were subdued,” she said.
“With many Americans still out of work, it would have been politically unsavvy for Bernanke to appear overly optimistic, knowing that members of Congress will be criticizing the pace of recovery in an election year where their constituents face near-double-digit unemployment,” she said.
Bernanke reiterated that the Fed had an exit strategy to avoid a surge in inflation when the economy recovers, but was not ready to use this.
“The Federal Reserve is taking steps to ensure that it will be able to smoothly withdraw extraordinary policy accommodation when appropriate,” he said.
The Fed was readying a variety of tools, including the rate it pays on bank deposits at the Fed, to mop up liquidity in the financial system, he said.
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