US Fed sees low inflation, hints at rate hold

22 August 2008 17:26  [Source: ICIS news]

WASHINGTON (ICIS news)--US Federal Reserve chairman Ben Bernanke said on Friday he expects inflation to moderate this year and in 2009 as oil and other commodity prices decline, raising expectations that the Fed will keep interest rates low.

 

In a speech to a financial conference at Jackson Hole, Wyoming, Bernanke noted that the “financial storm” triggered by the housing market collapse and resulting bank and credit woes has not yet subsided.

 

“Its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment,” the US central bank chief said. 

 

“Add to this mix a jump in inflation, in part the product of a global commodity boom, and the result has been one of the most challenging economic and policy environments in memory,” he said.

 

He noted that because of challenges facing the US economy, the Fed has kept its key federal funds interest rate low “despite an increase in inflationary pressures”.

 

At its rate-setting meetings on 25 June and 5 August, the Fed kept the federal funds rate at 2%, although market watchers had speculated the central bank might raise its rates to ward off inflationary risks created by record-high energy costs.

 

But Bernanke said that the Fed remains focused on maintaining policies that will help stimulate growth rather than anticipating and thwarting inflation.

 

He said the bank’s strategy “has been conditioned on our expectation that the prices of oil and other commodities would ultimately stabilise, in part as the result of slowing global growth, and that this outcome, together with well anchored inflation expectations and increased slack in resource utilisation, would foster a return to price stability in the medium run”.

 

“In this regard, the recent decline in commodity prices, as well as the increased stability of the dollar, has been encouraging,” Bernanke added.

 

“If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year,” the Fed chief said.

 

Although Bernanke also cautioned that the inflation outlook “remains highly uncertain,” his forecast of lessening inflation risks for the rest of this year and into 2009 is seen as indicating that the Fed will not raise interest rates at its next meeting on 16 September or anytime soon thereafter.

 

The Dow Jones Industrial average was up some 180 points to 11,615, in part because of Bernanke’s comments but also due to crude prices falling below $120/bbl.

 

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By: Joe Kamalick
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