Fed Chief Calls For Modest Growth, Slowing Inflation;No Rate Hikes, For Now
By Jason Simpkins
Federal Reserve Chairman Ben S. Bernanke predicted yesterday that U.S. economic growth will pick up, and that inflation will gradually recede – the essence of cautiously optimistic remarks the central bank leader made to the House of Representatives Financial Services Committee.
“The U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy’s underlying trend,” Bernanke said during his presentation of the Federal Reserve’s semiannual economic forecast. “Core inflation should edge a bit lower, on net, over the remainder of this year and next year.”
He will likely reassert these points tomorrow when meeting with the Senate Banking Committee.
Overall Bernanke expects U.S. economic growth to range from 2.25% to 2.5% this year and 2.5% and 2.75% in 2008. Inflation will remain somewhat high – actually even ranging above the 2% level that is the upper level of the Fed’s inflation “comfort zone.” The Personal Consumer Expenditures price index, or PCE, excluding volatile food and energy prices, is likely to remain in the 2.0% to 2.25% range this year.
But instead of boosting short-term interest rates to squelch the up tick in prices, the Fed will instead allow inflation to drift back down to the more-tepid range of 1.75% to 2.0%, which it should do by next year, Bernanke said.
As Forbes magazine staffer Evelyn M. Rusli noted yesterday, “the Federal Reserve’s outlook is more than just a projection. The central bankers have the power to mold the outcome by changing interest rates, so the estimates can be taken to be targets.”
Inflation –the Fed’s chief concern since the time of Paul A. Volcker, who headed the central bank from August 1979 to August 1987 – seems to be subdued, at least for the time being . Inflation has receded for three straight months now, and the Fed’s preferred price gauge, which excludes the costs of food and energy, rose only 1.9% in May, down from a 12-year high of 2.4% in February. Bernanke attributed the boost to overall prices to the “sizeable” increases in food and energy prices, while noting that those costs are expected to recede in the coming months.
“If energy prices level off as currently anticipated, overall inflation should slow to a pace close to that of core inflation in coming quarters,” he said.
While the much-anticipated comments about inflation were positive, the deeply troubled U.S. housing market looms like a dark specter over the upbeat predictions for ongoing U.S. economic growth.
“To a considerable degree, the slower pace of economic growth in recent quarters reflects the ongoing adjustment in the housing sector,” Bernanke pointed out. He added that declines in home building, “will likely continue to weigh on economic growth over coming quarters.”
The housing market has seen its worst downturn since 1991, and the slump doesn’t look as if it’s going to end anytime, soon.
In the past month, Congress has encouraged the Fed to tighten its oversight of mortgage-lending activity after foreclosures jumped to their highest levels in five years. Fed policy makers have acknowledged that lending standards relaxed as $2.8 trillion in new mortgages were taken out between 2004 and 2006, the largest home-loan binge ever recorded.
Federal and state regulators have announced a plan to enhance cooperation in the supervision and enforcement of non-bank sub prime lenders, and issued stricter guidelines on sub prime loans. But Bernanke was very clear about the central bank’s role.
“We plan to exercise our authority under the Home Ownership and Equity Protection Act to address specific practices that are unfair or deceptive,” he said. “I expect that the Board will propose additional rules under HOEPA next year.”
Bernanke did not go into deep detail about some of the other factors that could trip up the economy, including the big run-up in stock prices, the spreading sub
prime problem, the ballooning trade deficit, and a tightening credit market.
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