Bernanke Avoids Rattling Financial Markets

The chairman of the Federal Reserve, Ben Bernanke, in his first report to Congress, said the economy in America is in a sustained expansion that may require additional interest rate increases to restrain inflation.“The economic expansion remains on track,” he said in testimony to the House Financial Services Committee. In addition to high energy prices, “another factor bearing on the inflation outlook is that the economy now appears to be operating at a relatively high level of resource utilization.”Mr. Bernanke avoided rattling financial markets, endorsing the view expressed at the Fed’s rate decision on January 31 that borrowing costs will likely need to rise further. He inherits from his predecessor Alan Greenspan an economy that’s picking up after the slowest quarter in three years. The yield on two-year Treasury notes reached a five-year high after his remarks.“The risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately – in the absence of countervailing monetary policy action – to further upward pressure on inflation,” Mr. Bernanke said.The Fed lifted its target rate 14 times since June 2004 to 4.5%, and Mr. Bernanke’s remarks matched the expectations of traders who anticipated he would signal further increases. The yield on the two-year U.S. Treasury note was at 4.69% at 5:12 p.m. in New York, from 4.68% on Tuesday. Earlier today, it rose to 4.71%. The dollar strengthened.“He’s stressing continuity, hinting at further tightening, and not sticking his neck out,” the chief U.S. economist at MFR, Josh Shapiro, said. Mr. Bernanke is “not leading the markets to believe there’s going to be any big changes in the way of policy.”Mr. Bernanke became chairman two weeks ago, succeeding Alan Greenspan, who ran the central bank for almost two decades. The hearing was Mr. Bernanke’s first opportunity to lay out the Fed’s forecasts and describe his own approach as head of the world’s most influential central bank. He endorsed Mr. Greenspan’s risk-management approach, without using that term, and said policy must be conducted with “rigorous analysis informed by sound economic theory.”“More tightenings are in the pipeline,” the chief economist at JPMorgan Chase & Co.’s private client services group in Columbus, Ohio, Anthony Chan, said. “Bernanke is working very hard to promote continuity by maintaining to a large degree the status quo that was in place at the Federal Reserve.”The transition of the chairmanship occurred with the economy in its fifth year of expansion, and with the unemployment rate at 4.7% in January, the lowest in more than four years. The government reported on Tuesday that retail sales rose 2.3% in January, the fifth straight monthly increase.“It is clear that substantial progress has been made in removing monetary policy accommodation,” Mr. Bernanke said in his text. Policy makers in coming quarters “will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data.”The new Fed chairman cited the slowing housing market as one risk to the expansion, although he said a “moderate softening” seemed more likely than a “sharp contraction.”“There are some straws in the wind that housing markets are cooling a bit,” Mr. Bernanke said in response to a question during his testimony. “If the housing market does cool more or less as expected, that would still be consistent with a strong economy.”

Bernanke Avoids Rattling Financial Markets

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