BERNANKE - A CLIFF AHEAD - BAD NEWS

Thursday 01 March 2012 at 12:56 pm. Used tags: , , , , , ,

Bernanke strikes a downbeat tone

Ben S. Bernankek, chairman of the US Federal Reserve©Bloomberg

Ben Bernanke struck a downbeat tone on the health of the US economy - in spite of an upward revision of growth in the fourth quarter of 2011 - leaving it unclear whether the Federal Reserve would further ease monetary policy.

In testimony to Congress on Wednesday, the Fed chairman said that the labour market was doing better, but the fundamentals supporting consumer spending “continue to be weak”.

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Mr Bernanke’s cautious comments came as the Bureau of Economic Analysis revised up its growth estimate for the fourth quarter of 2011 from an annualised rate of 2.8 per cent to 3 per cent. Most of that growth came from an inventory build-up, with growth in final sales to domestic purchasers, a crucial measure of demand in the economy, revised up only from 0.9 per cent to 1.1 per cent.

Mr Bernanke’s comments suggest that the Fed has made no decisions about another round of quantitative easing – sure to be nicknamed QE3. The central bank’s policy will depend on whether or not consumer demand follows the improvement in the labour market.

“In light of the somewhat different signals received recently from the labour market than from indicators of final demand and production...it will be especially important to evaluate incoming information to assess the underlying pace of economic recovery,” said Mr Bernanke.

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The absence of any hints on further Fed easing jolted financial markets with gold dropping 2.9 per cent to $1,731 an ounce and the yield on 10-year US treasuries rising five basis points to 1.98 per cent.

“I think the gold guys thought Bernanke would be more positive about the prospects for QE3,” said Michael Kastner, principal at Halyard Asset Management.

Mr Bernanke said that the drop in the unemployment rate from 9 per cent last September to 8.3 per cent in January had been “somewhat more rapid than might have been expected”, given that the economy was not growing that fast.

“The fundamentals that support spending continue to be weak: real household income and wealth were flat in 2011, and access to credit remained restricted for many potential borrowers,” said the Fed chairman. “The job market remains far from normal.”

Mr Bernanke’s concerns may have been assuaged a little by revisions to incomes data for the fourth quarter which suggest that the savings rate held steady at 4.5 per cent instead of dropping back to 3.7 per cent.

“Household finances look to be on a much firmer footing than we were previously led to believe,” noted Paul Ashworth at Capital Economics in Toronto, but he added that growth in consumer spending power was “still pretty low even with these upward revisions”.

Mr Bernanke said that Fed officials expected inflation to stay low into next year but he noted the recent surge in oil prices. The rise in oil prices “is likely to push up inflation temporarily while reducing consumers’ purchasing power”, he said, suggesting that the Fed is more concerned about the negative effect on growth than any upward pressure on inflation.

The Fed chairman’s comments on monetary policy closely followed those made after the central bank’s last meeting in January suggesting that interest rates would have to stay exceptionally low through to late 2014. Economists said it was highly unlikely there would be any changes to policy when the Fed meets again in two weeks time.

Mr Bernanke emphasised his concern about long-term unemployment. “People who are out of work for six months or more will be starting to lose skills,” he said. “They will be losing attachment to the labor force. They won’t know what’s happening in their field or their industry. And that’s really one reason for urgency to try to get jobs created and try and bring the economy back to a more normal labour market.”

Additional reporting by Michael Mackenzie in New York

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