Arab Today, arab today bernanke warns against premature policy tightening
Last Updated : GMT 22:19:28
Arab Today, arab today
Arab Today, arab today

Bernanke warns against premature policy tightening

Arab Today, arab today

Arab Today, arab today Bernanke warns against premature policy tightening

Washington - AFP

US Federal Reserve Chairman Ben Bernanke acknowledged the risks of the Fed\'s low interest-rate policy Wednesday but warned that tightening policy now could stall the US recovery. Defending the Fed\'s continuing stimulus, Bernanke told Congress that US economic growth continues at a moderate pace with no threat of inflation or, as some analysts have worried recently, deflation. On the other hand, he pointed to continued weaknesses in the economy, especially high joblessness and the drag on growth of federal spending cuts, that justify the Fed\'s aggressive bond-purchase policy aimed at keeping longer-term interest rates low. Bernanke told Congress\'s Joint Economic Committee that the Fed\'s policy board, the Federal Open Market Committee, could decide to begin reducing the bond purchases in its next few meetings, but only if the FOMC has confidence that economic gains can be sustained. \"A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,\" Bernanke said in a statement. The FOMC, he said, is well aware of the costs and risks to having held interest rates at an ultra-low 0-0.25 percent since the end of 2008. Conservative \"inflation hawks,\" including some members of the FOMC, have voiced worries that the Fed could have a very difficult time reeling in surplus liquidity in the economy and forestalling a burst of inflation if the Fed did not begin tightening policy now. But the Fed needs to stick to its mission of helping drive down unemployment as long as inflation is not a threat, Bernanke emphasized. \"Recognizing the drawbacks of persistently low rates, the FOMC actively seeks economic conditions consistent with sustainably higher interest rates,\" he said. \"Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions.\" Bernanke\'s testimony sparked a surge in European and US share markets and in the euro, with some of the gains -- all of them for the euro -- given back in subsequent trade. Around 1530 GMT the S&P 500 was up about 0.6 percent, and the euro was down 0.2 percent on the dollar, to $1.2876. Bernanke told legislators that the job market has shown improvement recently, with average monthly job generation at more than 200,000 over the past half-year, pushing the jobless rate down to 7.5 percent. But Bernanke said the rate of long-term unemployment is still high and that eight million people are still working part-time when they want full-time jobs. He also said that even as the economy expanded at a 2.5 percent pace in the first quarter, sharp US government budget cuts that started in March and the rise in payroll and other taxes from January will exert \"a substantial drag on the economy this year.\" His testimony came amid much speculation over when the Fed will begin slowing its key tool for stimulating the economy, its $85 billion a month bond purchases known as quantitative easing. Queried on this by the legislators, Bernanke said the FOMC is preparing an exit strategy and that they were \"certainly confident\" that they could rein in the program without hurting economic stability. However, he said, when and how it does all depends on the flow of the economic data. \"What we are looking for is increased confidence that the labor market is improving,\" he said. FOMC vice chairman William Dudley told Bloomberg television in an interview aired Wednesday morning that the board probably needed to see three to four months more of data to understand the economy\'s direction in the light of the government\'s \"sequester\" spending cuts. \"I don\'t really understand very well how the tug-of-war between the fiscal drag and the improving economy are going to work their way out,\" Dudley said. Jim O\'Sullivan, chief US economist at High Frequency Economics, said the parallel statements were likely coordinated to quell growing speculation over a policy move in the markets. \"The chairman is clearly putting more emphasis on continued easing for now. He appears to want that message to set the tone for markets,\" O\'Sullivan said.

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