Fed Chief’s Outlook For Economy Positive

The outlook for the world’s largest economy is headed in the right direction in spite of a slowing housing market, and risks regarding inflation are benign, the chairman of the Federal Reserve said.

London’s The Guardian reports that Federal Reserve chair Ben Bernanke, in a semi-annual testimony to the U.S. Senate, was optimistic about the economy - which was enough to push the FTSE 100 share index to its highest closing level for six years at 6,421.2.

“Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes,” said Bernanke, who took over from Alan Greenspan a year ago.

“There are indications that inflation pressures are beginning to diminish. The monthly data are noisy, however, and it will consequently be some time before we can be confident that underlying inflation is moderating as anticipated.”

He added that core inflation was “somewhat elevated”.

In particular, the U.S. central bank chief said it was hard to forecast energy prices.

“They remain a key source of uncertainty to the inflation outlook.”

He added that the current level of U.S. mortgage rates are likely to foster sustainable growth in housing, and that the country’s interest rates should remain low enough to gradually stave off core inflation.

However, he repeated that the Fed “is prepared to take action to address inflation risks if developments warrant.”

U.S. stocks and bond prices rose and the dollar fell as markets interpreted Bernanke’s remarks as indications the Fed may be able to cut interest rates - which would undoubtedly stabilize mortgage loan rates - later this year.

Separate data showed U.S. consumer spending remained nearly unchanged in January from December, which was weaker than expected.

But with an upward revision to the December figure, spending remained at a high level, analysts say. There has been concern that consumers, who have borrowed heavily against the rising value of their properties in recent years using home equity loans, would rein spending as house prices fell.

But there has been little sign of that negative impact coming through. Yet.

Keith Gyles, economist at Capital Economics, said he thought that Americans would likely moderate their spending later in the year.

“With house prices now falling outright and home mortgage equity withdrawal already fading we think that households will be persuaded to save more and spend less.

“This should result in more modest consumption growth, leading the Fed to cut interest rates later this year,” he said.

SOURCE: The Guardian