Bernanke sees steady US economy despite potential perils
Friday, 20 July 2007
WASHINGTON, July 19 (AFP): Despite a host of potential economic perils, Federal Reserve chief Ben Bernanke says he believes the US economy will pull through 2007 and into 2008 in relatively good shape.
Bernanke, delivering the Fed's much-anticipated semiannual economic report yesterday, said the US housing slump may yet do more damage, and that the inflation threat remains significant.
But despite risks of a housing meltdown or an inflationary surge, Bernanke and his Fed colleagues made only minor changes to the central bank's economic forecast.
Analysts said the latest forecast means the Fed is likely to hold off on any interest rate moves in the near future.
The Fed trimmed its outlook for 2007 growth to a range of 2.25 to 2.5 per cent, down from a 2.5 to 3.0 per cent range in the Fed's outlook in February.
This downgrade had been widely expected in view of the weak 0.7 per cent pace of growth in gross domestic product (GDP) in the first quarter.
The Fed also cut its forecast for GDP growth in 2008 by a quarter-point to a range of 2.5 to 2.75 per cent, suggesting the slide in the property market could extend longer than previously expected.
The central bank left unchanged its forecast for core inflation of 2.0 to 2.25 per cent for 2007 and 1.75 to 2.0 per cent for 2008 -- thus coming into line with what some see as the bank's unofficial comfort zone of one to two per cent.
"It is interesting to note growth forecasts are below trend yet inflation will be above its comfort zone this year and above the middle of its comfort zone next year," said Mary Ann Hurley, analyst at DA Davidson.
"This bodes for policy to remain unchanged."
The Fed has held its base rate at 5.25 per cent for the past 13 months, but has repeatedly warned of inflation risks.
The rhetoric suggests the next Fed move may be to hike rates, even while some economists say the soft economic conditions call for a rate cut.
Global Insight economist Brian Bethune said Bernanke appears convinced the economy will avert the major upside and downside risks. "The economy is traversing the current business cycle slowdown with relatively few signs of stresses outside of the housing market," he said.
"Further downside risks to the housing sector are balanced against upside risks to inflation, and Fed interest rate policy is on hold pending further changes to the risk profile."
Bernanke reiterated that inflation remains the biggest risk to the economic outlook and said that an easing of inflation pressures has "yet to be convincingly demonstrated."
Addressing the troubles of subprime mortgage loans, Bernanke said this has led to "personal, economic and social distress" for many homeowners and communities and that these problems "likely will get worse before they get better."
Still, the central bank predicted said the economy will pull through as a result of relatively steady consumer spending, employment gains and business investment.
Bernanke, delivering the Fed's much-anticipated semiannual economic report yesterday, said the US housing slump may yet do more damage, and that the inflation threat remains significant.
But despite risks of a housing meltdown or an inflationary surge, Bernanke and his Fed colleagues made only minor changes to the central bank's economic forecast.
Analysts said the latest forecast means the Fed is likely to hold off on any interest rate moves in the near future.
The Fed trimmed its outlook for 2007 growth to a range of 2.25 to 2.5 per cent, down from a 2.5 to 3.0 per cent range in the Fed's outlook in February.
This downgrade had been widely expected in view of the weak 0.7 per cent pace of growth in gross domestic product (GDP) in the first quarter.
The Fed also cut its forecast for GDP growth in 2008 by a quarter-point to a range of 2.5 to 2.75 per cent, suggesting the slide in the property market could extend longer than previously expected.
The central bank left unchanged its forecast for core inflation of 2.0 to 2.25 per cent for 2007 and 1.75 to 2.0 per cent for 2008 -- thus coming into line with what some see as the bank's unofficial comfort zone of one to two per cent.
"It is interesting to note growth forecasts are below trend yet inflation will be above its comfort zone this year and above the middle of its comfort zone next year," said Mary Ann Hurley, analyst at DA Davidson.
"This bodes for policy to remain unchanged."
The Fed has held its base rate at 5.25 per cent for the past 13 months, but has repeatedly warned of inflation risks.
The rhetoric suggests the next Fed move may be to hike rates, even while some economists say the soft economic conditions call for a rate cut.
Global Insight economist Brian Bethune said Bernanke appears convinced the economy will avert the major upside and downside risks. "The economy is traversing the current business cycle slowdown with relatively few signs of stresses outside of the housing market," he said.
"Further downside risks to the housing sector are balanced against upside risks to inflation, and Fed interest rate policy is on hold pending further changes to the risk profile."
Bernanke reiterated that inflation remains the biggest risk to the economic outlook and said that an easing of inflation pressures has "yet to be convincingly demonstrated."
Addressing the troubles of subprime mortgage loans, Bernanke said this has led to "personal, economic and social distress" for many homeowners and communities and that these problems "likely will get worse before they get better."
Still, the central bank predicted said the economy will pull through as a result of relatively steady consumer spending, employment gains and business investment.