Bernanke Sees Temporary Inflation Gain From Commodities
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg
March 1 (Bloomberg) -- U.S. Senator Richard Shelby, a Republican from Alabama and ranking member on the Senate Banking Committee, discusses Federal Reserve Chairman Ben S. Bernanke's semiannual testimony before the panel today in Washington and the central bank's quantitative easing policy. Shelby, speaking with Peter Cook on Bloomberg Television's "Bottom Line," also talks about the Pentagon's decision to award Boeing Co. a contract for a $35 billion program to build 179 Air Force refueling tankers. (Source: Bloomberg)
March 1 (Bloomberg) -- Vincent Reinhart, resident scholar at the American Enterprise Group, talks about Federal Reserve Chairman Ben S. Bernanke's testimony to the Senate Banking Committee today. Reinhart speaks with Betty Liu on Bloomberg Television's "In The Loop." Kevin Rendino, of BlackRock Inc., also speaks. (Source: Bloomberg)
March 1 (Bloomberg) -- Ward McCarthy, chief financial economist at Jefferies & Co., talks about Federal Reserve Chairman Ben S. Bernanke's testimony before the Senate Banking Committee today and the outlook for the U.S. economy and Fed policy. Bernanke said the surge in oil and other commodity prices probably won’t cause a permanent increase in broader inflation and repeated that borrowing costs are likely to stay low. McCarthy speaks with Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Federal Reserve Chairman Ben S. Bernanke said the surge in oil and other commodity prices probably won’t cause a permanent increase in broader inflation and repeated that borrowing costs are likely to stay low.
Experience with such price gains in recent decades, along with currently stable labor costs, suggests a “temporary and relatively modest increase in U.S. consumer price inflation,” Bernanke said today in his semi-annual monetary policy testimony before the Senate Banking Committee in Washington. He reiterated the Fed’s outlook that while growth will accelerate this year, he still wants to see a “sustained period of stronger job creation.”
The comments suggest the Fed will stay on course to complete $600 billion of Treasury purchases through June in a bid to reduce an unemployment rate persisting at 9 percent or higher for almost two years. Bernanke didn’t say what the Fed’s next step will be after finishing the bond buying under record monetary stimulus that has been criticized by Republicans he’s facing today and tomorrow.
Even with his inflation outlook, “sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored,” said Bernanke, 57, a former Princeton University economist. “We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability.”
Oil Rallies
Oil for April delivery rallied 2.7 percent to $99.63 a barrel in New York, the highest since September 2008, amid speculation unrest in the Middle East and northern Africa will disrupt supplies. The Standard & Poor’s 500 Index fell 1.3 percent to 1,310.20 as of 2:53 p.m. on concern rising energy costs will threaten the economic recovery.
“There is no rush to tighten” monetary policy, said Jim O’Sullivan, global chief economist at MF Global Inc. in New York. “Growth has improved, but we have a long way to go. Bernanke is emphasizing that a sustained labor-market recovery is not yet established.” In addition, Bernanke’s message is that “while they are watching commodity prices, they will have only have a temporary impact on inflation,” O’Sullivan said.
A separate report today showed U.S. manufacturing accelerated in February to the fastest pace since May 2004. The Tempe, Arizona-based Institute for Supply Management’s factory index increased to 61.4 from 60.8 a month earlier. Readings greater than 50 signal growth.
Sixth Year
Now in his sixth year as Fed chief, Bernanke helped navigate the world’s largest economy through an 18-month contraction, the longest slump since the Great Depression, according to the National Bureau of Economic Research.
Under questioning from senators, Bernanke said he didn’t think there would be a “big impact” on market interest rates when the Fed ends its asset purchases, because rates are affected more by the stock of central bank holdings rather than the flow of purchases.
The chairman repeated his call for lawmakers to adopt a long-term plan to reduce the federal government’s debt, and said the Fed won’t buy state debt to alleviate any funding crunch. It’s “possible” that U.S. states could pose a risk to the financial system, he said.
“Currently, while states are facing very tough financial conditions, at least as long as the recovery continues, they are seeing higher tax revenues and that will at least be helpful to some of them,” Bernanke said.
Deflation Risk
Since August, when Bernanke signaled the Fed might buy securities to stimulate the economy, “downside risks to the recovery have receded, and the risk of deflation has become negligible,” he said today.
Last week, the Commerce Department reduced its estimate of fourth-quarter economic growth to a 2.8 percent annual pace from 3.2 percent as state and local governments made deeper cuts in spending. Consumer purchases rose at a 4.1 percent pace, the most since the same three months in 2006, compared with a 4.4 percent rate originally estimated.
Inflation is likely to remain low through 2013, Bernanke said. Crude oil has gained 14 percent since Feb. 18 as political turmoil intensified in Libya, Africa’s third-biggest oil producer.
The Fed’s preferred price gauge, which excludes food and fuel, rose 0.8 percent in January from a year earlier, matching December’s year-over-year gain, the lowest in five decades of record-keeping. Fed officials aim for long-run overall inflation of 1.6 percent to 2 percent.
Global Demand
Increases in commodity prices in recent months mainly reflect “rising global demand for raw materials, particularly in some fast-growing emerging market economies, coupled with constraints on global supply in some cases,” Bernanke said. He also said that commodity prices “have risen significantly in terms of all major currencies,” rejecting the idea that the Fed’s easy monetary policy is responsible.
Increases in gasoline prices, “while obviously a problem for a lot of people,” don’t pose a major risk yet to the recovery or inflation, Bernanke said.
Fed officials differed in January over whether signs that the recovery is gaining strength would warrant reducing or slowing record monetary stimulus, according to minutes of the Jan. 25-26 meeting by the policy-setting Federal Open Market Committee. The panel next meets on March 15.
New York Fed President William Dudley, who serves as the FOMC’s vice chairman, said in a speech yesterday that the “considerably brighter” economic outlook isn’t yet reason for the central bank to withdraw its record monetary stimulus.
High Threshold
At the FOMC’s December meeting, some Fed officials indicated that “they had a fairly high threshold for making changes to the program” of so-called quantitative easing, according to minutes of the session.
Fed policy makers “continue to regularly review the asset purchase program in light of incoming information, and we will adjust it as needed to promote the achievement of our mandate from the Congress of maximum employment and stable prices,” Bernanke said today. “We have all the tools we need to achieve a smooth and effective exit at the appropriate time.”
Bernanke signaled the possible use of an additional tool by saying the Fed can drain money from the banking system by “ceasing the reinvestment of principal payments on the securities it holds,” reversing a policy begun in August.
Growth Forecasts
The Fed chief and his colleagues in recent months have forecast that growth would pick up this year without producing a big drop in joblessness. In January projections made public on Feb. 16, central bankers said inflation-adjusted gross domestic product would rise 3.4 percent to 3.9 percent this year, compared with November forecasts of 3 percent to 3.6 percent.
Service industries expanded in January at the fastest pace since August 2005, while manufacturing grew by the most since 2004, according to reports last month from the Institute for Supply Management.
Manufacturers such as Deere & Co. are raising profit forecasts as business investment in new equipment accelerates and exports climb as the global economy recovers.
The Bloomberg Consumer Comfort Index climbed in the week through Feb. 20 to the highest level since April 2008 as Americans grew less pessimistic about their finances.
At the same time, the labor market “has improved only slowly,” and it may take “several years” for the unemployment rate to reach a “more normal level,” Bernanke said today.
Bernanke reiterated his view that the asset-purchase plan has helped narrow corporate bond spreads and boost share prices. The S&P 500 has increased 9 percent since Nov. 3, when policy makers announced the program.
Enhancing Transparency
He said the Fed “will continue to seek ways of enhancing our transparency without compromising our ability to conduct policy in the public interest.” Bernanke didn’t announce any new steps toward increasing communication with the public; Fed officials are reviewing options including having the chairman hold regular press conferences.
Also today, the Federal Reserve Bank of San Francisco said it had chosen its research director, John C. Williams, 48, as its new president. He replaces Janet Yellen, who left last year to become the Fed board’s vice chairman. Williams will participate in the central bank’s policy discussions and vote on the Federal Open Market Committee once every three years, starting in 2012.
1 comment:
The economy’s recovery is not a given, as time will show.
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