U.S. Economy Will Weather Storm Through 2007, Fed Chief Says
U.S. economic expansion is likely to remain on track through 2007, riding out a storm more or less limited to the housing sector, Federal Reserve chairman Ben Bernanke (left) said on Tuesday.
In a detailed speech, Bernanke said growth is expected to pick up next year and that inflationary pressures are likely to ease, CNN reported Tuesday afternoon.
Bernanke’s assessment suggested a soft landing for the U.S. economy after the central bank’s 17 consecutive hikes in interest rates through August aimed at taming inflation - and which led to substantial increases in mortgage rates, which have cooled off a bit since the Fed has held rates steady.
“The deceleration in economic activity under way appears to be taking place roughly along the lines envisioned in the Federal Reserve’s July report,” Bernanke said. “As anticipated, the slowdown primarily reflects a cooling housing market. Most other sectors of the economy still appear to be expanding at a solid rate, and the labor market has tightened further.”
He said overall inflation had been fuelled by a spike in energy prices that has been mostly reversed. But he added that the level of core inflation remains uncomfortably high.
Growth in the fourth quarter of 2006 is likely to be “in the same range” as the prior two quarters — 2.6 percent in the second quarter and 1.6 percent in the third. But he suggested an improvement in 2007 is likely. For those seeking home mortgages, 2007 may prove a great time to buy a home as home loan rates remain low and economic stability seems to be prevailing.
Economists have been awaiting confirmation of the soft-landing scenario, with some seeing a risk that the housing slump could trigger a recession.
The Fed has held its base rate at 5.25 percent since August, while hinting that it could boost rates further if needed to keep inflation in check. Some analysts see the central bank cutting rates in 2007 to stimulate the economy, but others say another rate hike might be needed.
Bernanke, as usual, offered no hint on the Federal Reserve’s next move. But he echoed earlier statements from the Fed that inflation may be retreating.
“Looking forward, core inflation seems likely to moderate gradually over the next year or so,” he said.
Bernanke said the economic weakness has been limited to housing, and some areas of manufacturing such as cars. But he noted that the downturn is part of a correction still being played out.
“No real or financial asset can be counted upon to pay a higher risk-adjusted return than other assets year after year, and housing is no exception. A slowing in the pace of house-price appreciation was inevitable,” he said. “Although the construction industry continues to sag, some indications suggest [housing] is stabilizing.”
Elsewhere, he said economic activity has been mostly strong.