New Fed head says economy back on track

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New Fed head says economy back on track Bernanke leaves door open for interest-rate hikes Wednesday, February 15, 2006 Inman News

Ben Bernanke New Federal Reserve Chairman Ben Bernanke delivered his first economic report to Congress, saying the economy has snapped out of an end-of-year lull and leaving the door open to higher interest rates in the future. "The FOMC (Federal Open Market Committee) judged that some further firming of monetary policy may be necessary, an assessment with which I concur," Bernanke said in his prepared remarks to the House Financial Services Committee. Recent economic barometers on jobs, production, retail sales and other business activity in January "suggests that the economic expansion remains on track," Bernanke told the committee. The expansion, he said, does have "a lot of staying power." Although higher energy prices down the road could feed inflation fears, a slowing housing market raises the prospects of crimping consumer spending, which has been an important ingredient to the country's economic health. The Fed will closely watch how these uncertainties play out, Bernanke said. Still, at this point, Bernanke suggested he was hopeful the highflying housing market would make a safe landing by gradually losing altitude. "A leveling out or a modest softening of housing activity seems more likely than a sharp contraction, although uncertainty attends the outlook for home prices and construction," Bernanke said. "Prices and construction could decelerate more rapidly than currently seems likely." At the Fed's January meeting, then-Fed Chairman Alan Greenspan boosted the Federal funds rate to 4.5 percent, the highest in nearly five years, to fend off inflation. It marked the 14th increase since the Fed began to tighten credit in June 2004. Before Bernanke became Fed chief, Fed policy-makers had differed on how much higher interest rates need to go but still signaled that the nearly two-year rate-raising campaign would probably be drawing to a close this year. Bernanke said decisions on the future course of interest rates would depend more heavily on what upcoming reports say about economic activity and inflation. "In coming quarters, the (Fed) will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data," Bernanke said. His first meeting as Fed chairman to decide interest rates will be March 27-28. Bernanke, however, made clear that fighting inflation is a crucial Fed mission. "Stable prices promote long-term economic growth by allowing households and firms to make economic decisions," he said. A stable price climate also nurtures employment growth, he said. While energy prices raise one risk for the economy, another is posed by the future direction of the housing market, Bernanke said.