Fed chairman Ben Bernanke expects US inflation to ease
over the next couple of years as economic growth slows
down to a more moderate pace. In his testimony to the
banking committee of the US Senate, the Fed chief gave
many indications that the Fed would prefer to stop raising
interest rates if economic indicators give enough signs
of a slowdown.
by Bernanke clearly indicated that the Fed is worried
about hiking interest rates too far and causing a considerable
decline in economic growth rates. US stock markets rallied
yesterday after the testimony on expectations that the
Fed would indeed stop hiking interest rates, at least
for a brief period.
Fed expects the US economy to real GDP to increase about
3.25 per cent to 3.5 per cent in 2006 and 3 per cent to
3.25 per cent in 2007. "Overall, the US economy seems
poised to grow in coming quarters at a pace roughly in
line with the expansion of its underlying productive capacity,"
Bernanke said in a prepared statement read out before
the Senate committee.
US economy appears to be in a period of transition. After
several years of above-trend growth, slack in resource
utilisation has been substantially reduced. As a consequence,
a sustainable, non-inflationary expansion is likely to
involve a modest reduction in the growth of economic activity
from the rapid pace of the past three years to a pace
more consistent with the rate of increase in the nation's
underlying productive capacity", Bernanke said in
Fed is maintaining its outlook on global economic growth.
"Globally, output growth appears strong. Growth of
the global economy will help support US economic activity
by continuing to stimulate demand for our exports of goods
and services. One downside of the strength of the global
economy, however, is that it has led to significant increases
in the demand for crude oil and other primary commodities
over the past few years", the statement said.
said projections by the Fed based on current data are
"for a gradual decline in inflation in coming quarters.
As measured by the price index for personal consumption
expenditures excluding food and energy, inflation is projected
to be 2.25 per cent to 2.5 per cent this year and then
to edge lower, to 2 per cent to 2-.25 per cent next year."
the Fed remains conscious of the inflationary risks facing
the US economy. "Although our baseline forecast is
for moderating inflation, the Committee judges that some
inflation risks remain. In particular, the high prices
of energy and other commodities, in conjunction with high
levels of resource utilisation that may increase the pricing
power of suppliers of goods and services, have the potential
to sustain inflation pressures. Persistently higher inflation
would erode the performance of the real economy and would
be costly to reverse", the statement added.
crude oil prices the statement said, "The spot price
of oil has moved up significantly further in recent weeks.
Futures quotes imply that market participants expect petroleum
prices to roughly stabilise in coming quarters; such an
outcome would, over time, reduce one source of upward
pressure on inflation. However, expectations of a levelling
out of oil prices have been consistently disappointed
in recent years."
Fed is more worried about the impact of rising wages on
inflation. "Although the costs of energy and other
raw materials are important, labour costs are by far the
largest component of business costs. Employee compensation
per hour is likely to rise more quickly over the next
couple of years in response to the strength of the labour
faster increases in nominal compensation create additional
cost pressures for firms depends in part on the extent
to which they are offset by continuing productivity gains.
Profit margins are currently relatively wide, and the
effect of a possible acceleration in compensation on price
inflation would thus also depend on the extent to which
competitive pressures force firms to reduce margins rather
than pass on higher costs" , Bernanke said in the
defended the last rate hike by the Fed to 5.25 per cent,
saying inflation has been higher than anticipated. "During
the first five months of the year, overall inflation averaged
4.3 per cent at an annual rate. Over the same period,
core inflation that is, inflation excluding food
and energy prices averaged 2.6
per cent at an annual rate. To address the risk that inflation
pressures might remain elevated, the Federal Open Market
Committee (FOMC) continued to firm the stance of monetary
policy", he said.