Thursday, February 25, 2010

Rates to stay low for some time: Bernanke

Fed chief says US job market remains weak despite signs of growth

WASHINGTON: Federal Reserve chairman Ben Bernanke told Congress yesterday that a weak job market and low inflation would likely allow the US central bank to keep interest rates at very low levels for 'an extended period'.

In his first appearance before Congress following a testy confirmation vote in the Senate last month, Mr Bernanke offered a relatively sombre assessment of the United States economy despite recent signs of strong growth.

The country has lost 8.4 million jobs since the start of the economic downturn, the deepest since the Great Depression. The Fed chief said job losses were abating, but also acknowledged the recession's toll on American workers.

'Notwithstanding the positive signs, the job market remains quite weak,' Mr Bernanke said in prepared testimony to the US House of Representatives Financial Services Committee.

He told lawmakers that he stood prepared to continue supporting the economy with extraordinary stimulus for some time, but also argued the Fed possessed a broad array of tools to remove such accommodation when the time was right.

Deciding when to boost rates will be the next big challenge facing Mr Bernanke. Boosting rates too soon could derail the recovery. But waiting too long could trigger inflation and feed a speculative asset bubble. That, too, could threaten the economy, along with Americans' pocketbooks and nest eggs.

Mr Bernanke would say only that 'at some point', the Fed would need to move to tighten credit. He sketched out the Fed's strategy, first unveiled on Feb 10, on how this would be done.

He said the Fed is likely to boost the rate it pays banks on money they leave at the central bank, which would mark a shift away from the funds rate, the Fed's main tool since the 1980s. A bump up in the interest rate on bank reserves, though, would ripple though the economy in much the same way an increase in the funds rate does. Consumers and business borrowers would have to pay more for loans.

Meanwhile, government data yesterday hinted at potential trouble for the fragile housing market recovery, showing sales of newly built single-family homes unexpectedly fell to a record low last month.

The Commerce Department said sales dropped 11.2 per cent to a 309,000-unit annual rate, the lowest level since records started in January 1963, from an upwardly revised 348,000 last December.

The percentage decline last month was the largest in a year. Analysts polled by Reuters had expected new home sales to increase to a 360,000-unit annual pace from December's previously reported 342,000 units.

Compared to January last year, sales fell 6.1 per cent.

'It's awful. This is with the home buyer tax credit. I don't understand people who say the housing market is turning,' said Mr Joe Saluzzi, co-manager of trading at Themis Trading in New Jersey.

Source: Straits Times, 25 Feb 2010

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