US Federal Reserve Chairman Ben Bernanke appears to have laid out the dream economic scenario for Wall Street: a "soft-landing" that should curb inflation and allow rate rises to go on hold.
But in twice-yearly testimony to Congress, Bernanke also kept his options open by warning that energy-fuelled price pressures remain enough of a concern to keep the US central bank vigilant.
For financial markets, the salient aspect of Bernanke's remarks this past week was that both economic growth and inflation in the world's biggest economy are moderating to a "sustainable" pace.
PHOTO: AFP
Most economists said the Fed was setting the stage to call off a campaign of hikes that has seen the bank raise US interest rates 17 times running to leave the headline cost of borrowing at 5.25 percent.
But a pause to the campaign at the Fed's next meeting on Aug. 8 is by no means a done deal.
"Our read on the Fed is that officials foresee a slowing economy and want to stop hiking rates," Societe Generale economist Stephen Gallagher said.
But he added: "They are deeply fearful of being seen as overly dovish and worry that their credibility could be eroded and that inflation expectations might rise."
On balance, many pundits argued, the Fed might be better advised to hike one more time next month as an insurance policy against price pressures before standing pat in September.
Bernanke told two committees in Congress on Tuesday and Wednesday that after years of stellar growth, the US economy is entering a period of "transition" to a more moderate pace.
"Should that moderation occur as anticipated, it should help to limit inflation pressures over time," he said.
Markets around the world took that as a cue to drive share prices skyward. In New York on Wednesday, the Dow Jones average leapt 212.19 points to close at 11,011.42.
The US economy grew at a blistering pace of 5.6 percent in the first quarter to March. The government's first estimate for second-quarter growth is due out on Friday, and consensus forecasts predict a slowing to 3.1 percent.
The most recent inflation indicators have shown price pressures building on both the consumer and production fronts, following a startling rally on oil markets that saw crude futures recently top US$78 a barrel.
But the signs for inflation further forward are more benign, Bernanke believes, noting that futures quotes foresee that oil prices will stabilize in the coming months.
Indeed, minutes of the Fed's last meeting on June 28-29 showed that the decision then to hike rates afresh was a "close call."
Most members of the central bank's Federal Open Market Committee (FOMC) noted that "significant uncertainty" accompanied the decision, the minutes released on Thursday showed.
But Bernanke is not ruling anything out.
In his appearance before the House of Representatives Financial Services Committee, he warned of "significant consequences" for the US economy if oil prices surge an extra US$10 to US$15.
The result has been to leave market betting on an a rate hike next month evenly balanced.
Nomura US economist David Resler said that the FOMC has much to chew over, noting market expectations that the Fed may have to resume rate hikes as early as next year if a pause next month proves premature.
"The FOMC members may rightly feel conflicted by adopting a policy that the market expects but believes to be ill-advised," he said.
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