Washington: Federal Reserve chairman Ben S. Bernanke said that interest rates are “well positioned” to promote growth and stable prices, and that policy makers are “attentive” to the impact of the falling dollar.
The Fed is working with the treasury to “carefully monitor developments in foreign exchange markets” and is aware of the effect of the dollar’s decline on inflation and price expectations, Bernanke said on Tuesday in his first speech on the economic outlook in two months.
The dollar climbed more than 1 cent against the euro and the price of gold dropped almost $14 (Rs595) after Bernanke’s remarks reinforced speculations that the Fed will refrain from lowering rates further. Policy makers lowered the benchmark rate 3.25 percentage points since September to 2% to alleviate the damage to the economy from the credit crisis and housing recession. “I can’t recall such a strong defence of the dollar from a Fed chairman,” said Sophia Drossos, a currency strategist at Morgan Stanley in New York, who used to work at the New York Fed, where she helped manage the central bank’s foreign-exchange holdings. “The Fed is putting its marker down in letting the market know that a weaker dollar would be detrimental.”
Bernanke, 54, spoke via satellite to the International Monetary Conference in Barcelona, Spain. He is talking on a panel with European Central Bank president Jean-Claude Trichet, Bank of Japan governor Masaaki Shirakawa and Bank of Spain governor Miguel Fernandez Ordonez.
“For now, policy seems well positioned to promote moderate growth and price stability over time,” Bernanke said. “We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate.”
The dollar strengthened to $1.5505 against the euro from $1.5607 on Tuesday after weakening by 16% in the past year. Crude oil fell to $126.51 a barrel in New York morning trade from $127.98 before Bernanke’s comments were released.
“We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations,” Bernanke said. The Fed’s commitment to price stability and maximum employment “will be key factors ensuring that the dollar remains a strong and stable currency.”
Minutes of the Federal Open Market Committee’s (FOMC) 29-30 April meeting showed Fed policy makers, out of concern for inflation, wouldn’t pare rates further even with an economic contraction in the first half.
The decision to lower the main rate by a quarter point was a “close call” for most FOMC members, the minutes said. The reduction capped off 2.25 percentage points of reductions this year, including cuts of 0.75 point in January and in March. Traders expect the Fed to leave the overnight interbank lending rate at 2% through October.
“We have eased monetary policy substantially and proactively,” Bernanke said.
In his last comprehensive speech on the economic outlook, Bernanke said, “monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year.” He made the remarks on 2 April during a congressional testimony.
On Tuesday, Bernanke said financial market conditions “remain strained,” and consumers face “significant headwinds” from declining home prices, a weaker labour market, stricter lending standards and higher energy costs.
A US commerce department report last week showed that the US economy grew more than previously estimated in the first quarter as Americans shunned imports and exports climbed to a record. The 0.9% gain at an annual pace in gross domestic product compares with an estimate of 0.6%.
The second quarter is “likely to be relatively weak,” Bernanke said, leaving out his mention in the April speech of a possible contraction. The second half may have “somewhat better economic conditions,” and growth may pick up further in 2009, he said.
Soaring oil costs, which officials deem to be a result of supply and demand rather than speculation or reduced interest rates, may impede a possible rebound in growth in the second half. Crude oil has climbed 93% in the past year, reaching a record $135.09 a barrel on 22 May. Petrol prices have also hit a record, impairing spending by consumers who are already buffeted by a slump in home values.
“The possibility that commodity prices will continue to rise is an important risk to the inflation forecast,” Bernanke said.
With reporting by Steve Matthews in Atlanta.