Fed economic view unfazed by stocks drop

Federal Reserve chairperson Ben Bernanke said on Wednesday this week’s sharp stock market drop had not changed the Fed’s view that the United States economy was sound, remarks that helped shaken markets regain confidence.

“My view is that taking all the new data into account, that there is really no material change in our expectations for the US economy since I last reported to Congress a couple weeks ago,” Bernanke told a congressional panel.

His remarks came a day after the US stock market suffered its worst slide since 2001, as a sell-off in China’s stock market raised fears equity valuations were too high.

The stock market plunge had driven investors into the safe-haven of US government debt and raised expectations the US central bank would cut interest rates by August.

Some of those bets, however, reversed on Bernanke’s soothing words to the House of Representatives’ Budget Committee, which suggested the US central bank was still focused on the risk inflation might not move down as hoped.

Two weeks ago, the Fed chief told Congress inflation looked set to ease, but reminded lawmakers that the Fed would act if it did not. The Fed has held overnight interest rates steady at 5,25% since June.

The US stock market regained its footing on Wednesday, aided by Bernanke’s faith in the health of the US economy. In early afternoon, the blue chip Dow Jones industrial average was up more than 80 points.
At the same time, the dollar rose against major currencies and bond prices slipped.

Markets functioning fine

Bernanke said there appeared to be no single trigger to what he termed Tuesday’s “market correction”, and he declined to pick apart different elements that may have contributed to the movement in stocks.

The Fed chairperson said a group composed of the Fed, the Treasury Department and other top financial regulators had been closely monitoring the markets, and he pronounced them in good health. “They seem to be working well, normally,” he said.

Bernanke said a downward revision on Wednesday in the government’s estimate of fourth-quarter economic growth—to a 2,2% annual pace from an initial 3,5% reading—was in keeping with the Fed’s view of the economy.

“The downward revision of the fourth-quarter GDP numbers we got this morning is actually more consistent with our overall view of the economy than were the original numbers,” he said.

“We expect moderate growth going forward,” he added.

Bernanke was not asked to address two other reports issued on Wednesday: one showing the biggest drop in new home sales in 13 years last month and another showing a slump in business activity in the Midwest in February.

Bernanke said there was a “reasonable possibility” that the economy would regain strength some time during the middle of the year if the downtrodden housing sector stabilizes and if manufacturers finish trimming a backlog of inventories.

Renews budget warning

Addressing the US budget situation, Bernanke renewed his caution that failure by lawmakers to take action soon to prepare for the retirement of aging baby boomers could lead to serious economic harm.

“A vicious cycle may develop in which large [budget] deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits,” Bernanke said in testimony nearly identical to remarks he delivered last month.

Bernanke said again on Wednesday that the United States needed to move toward fiscal policies that were sustainable and that would promote more saving to support the Social Security retirement program without imposing undue costs on taxpayers.

However, he offered no specific policy prescriptions.

“Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run,” Bernanke said.

Bernanke said advocates of lower taxes would have to accept lower spending on entitlement programs. Likewise, proponents of more-expansive government programmes must recognise the need for higher taxes to fund higher spending, he added. ‒ Reuters

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