By Steven K. Beckner

NEW YORK CITY (MNI) – Federal Reserve Chairman Ben Bernanke passed
on another opportunity to signal a coming shift in monetary policy
Wednesday.

A few Fed officials have lately indicated a desire to start
tightening policy relatively soon, but others think quite differently,
and Bernanke left little doubt in congressional testimony that he
remains in no rush to do so.

There can be little doubt from either his prepared testimony or his
responses to questions from the Joint Economic Committee: the Fed chief
did not bring forward the timing of interest rate hikes or, for that
matter, of quantitative tightening.

His comments on the economy differed little from those he made in a
speech last week, and he was even more explicit regarding the outlook
for interest rates. And so, with only two weeks to go before the Fed’s
policymaking Federal Open Market Committee meets again, it seems
unlikely that the FOMC will hasten the day of tightening by
significantly changing its policy statement.

At its March 16 meeting, the FOMC left the key federal funds rate
target in the zero to 25 basis point range and reiterated its
expectation that it would stay “exceptionally low … for an extended
period.”

Had he wanted to signal a shift in that language, which has been in
place since last March, Bernanke had a golden opportunity to do so with
his appearance before the JEC. But far from doing so, he echoed and
thereby reaffirmed the “extended period” phrase.

It was not in his prepared testimony, but in response to an early
question, Bernanke said, “The Federal Open Market Committee has stated
clearly that they currently anticipate that very low, extremely low
rates will be needed for an extended period.”

Echoing minutes of the March 16 meeting, as well as comments by
other policymakers, Bernanke made clear that “extended period” is a
contingent committment or expectation.

FOMC members “have emphasized, however, that forecast is
conditional on three sets of conditions,” he said, “one, very low
resources utilization — high unemployment, low capacity utilization;
second, subdued inflation trends — low inflation, and third,
stabilization expectations.”

If the outlook changes, “We will respond to that,” he said, adding
that the Fed will be looking at “a broad range of indicators” including
inflation expectations and “what is happening in financial markets” to
see that “financial imbalances are not building.”

Nor did his assessment of economic conditions and prospects suggest
any change in Bernanke’s policy perspective. His comments suggested a
continued mood of caution about the ability of the recovery to generate
adequate job creation and of relative contentment about the inflation
picture.

Supported by stimulative monetary and fiscal policies and the
concerted efforts of policymakers to stabilize the financial system, a
recovery in economic activity appears to have begun in the second half
of last year,” Bernanke said, and he went on to cite a number of areas
of improvement.

However, he cast doubt on the future strength of the expansion.

Much of the 5.6% fourth quarter increase in real GDP reflected
“firms’ success in working down the excess inventories that had built up
during the contraction, which left companies more willing to expand
production. Indeed, the boost from the slower drawdown in
inventories,” he said. “With inventories now much better aligned with
final sales, however, and with the support from fiscal policy set to
diminish in the coming year, further economic expansion will depend on
continued growth in private final demand.”

Bernanke said “the incoming data suggest that growth in private
final demand will be sufficient to promote a moderate economic recovery
in coming quarters.” But he once again warned that the economy faces
major potential pitfalls.

“Significant restraints on the pace of the recovery remain,
including weakness in both residential and nonresidential construction
and the poor fiscal condition of many state and local governments,” he
said. “Sales of new and existing homes dropped back in January and
February, and the pace of new single-family housing starts has changed
little since the middle of last year.”

“Outlays for nonresidential construction continue to contract amid
rising vacancy rates, falling property prices, and difficulties in
obtaining financing,” he continued. “Pressures on state and local
budgets, though tempered by ongoing federal support, have led to
continuing declines in employment and construction spending by state and
local governments.”

Bernanke has frequently cited weak labor markets and tight credit
as the two big “headwinds” facing the economy, and he did so again in
his latest outing.

There have been “some encouraging signs that layoffs are slowing
and that employment has turned up,” Bernanke said, but he added,
“However, if the pace of recovery is moderate, as I expect, a
significant amount of time will be required to restore the 8-1/2 million
jobs that were lost during the past two years.”

“I am particularly concerned about the fact that, in March, 44%t of
the unemployed had been without a job for six months or more,” he
continued. “Long periods without work erode individuals’ skills and hurt
future employment prospects. Younger workers may be particularly
adversely affected if a weak labor market prevents them from finding a
first job or from gaining important work experience.”

Likewise, with financial market conditions, Bernanke said they
“have improved considerably since I last testified before this Committee
in May of last year.” But he added, “Despite their stronger financial
positions, banks’ lending to both households and businesses has
continued to fall.”

“The decline in large part reflects sluggish loan demand and the
fact that many potential borrowers no longer qualify for credit, both
results of a weak economy,” he continued. “The high rate of write-downs
has also reduced the quantity of loans on banks’ books.”

“Banks have also been conservative in their lending policies,
imposing tough lending standards and terms,” he added. “This caution
reflects bankers’ concerns about the economic outlook and uncertainty
about their own future losses and capital positions.”

Bernanke said the risks of a “double digit” recession have lessened
in recent months but are not negligible.

Nor did Bernanke exhibit any concern about inflation.

“On the inflation front, recent data continue to show a subdued
rate of increase in consumer prices,” he said. “For the three months
ended in February, prices for personal consumption expenditures rose at
an annual rate of 1-1/4% despite a further steep run-up in energy
prices; core inflation, which excludes prices of food and energy, slowed
to an annual rate of 1/2 percent.”

Bernanke said “the moderation in inflation has been broadly based,
affecting most categories of goods and services with the principal
exception of some globally traded commodities and materials, including
crude oil.” What’s more, he said, “long-run inflation expectations
appear stable; for example, expected inflation over the next 5 to 10
years, as measured by the Thomson Reuters/University of Michigan Surveys
of Consumers was 2-3/4 percent in March, which is at the lower end of
the narrow range that has prevailed for the past few years.”

Some Fed officials have continued to warn that there is still a
risk that inflation could go too low, if not morph into actual
deflation. Bernanke did not say that, but said “a little bit of space”
is needed between inflation and deflation.

Shortly after Bernanke concluded his testimony, the Fed released
results of its latest “Beige Book” survey of conditions around the
nation, and while they showed continued growth in all but one Fed
district, they did not seem to add any impetus to monetary
tightening.

Certainly there was no evidence of wage-price pressures on a day
when the Labor Department’s consumer price index was reported up 0.1% in
March and flat excluding food and energy.

“While labor markets generally remained weak, some hiring activity
was evident, particularly for temporary staff,” the beige book
disclosed. “Wage pressures were characterized as minimal or contained.
Retail prices generally remained level, but some input prices
increased.”

** Market News International **

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