Bernanke Signals 'Extended' Low-Rate Period May Become Longer
Nov. 17 (Bloomberg) -- Federal Reserve Chairman Ben S.Bernanke’s diagnosis of a weak U.S. economy and labor marketsignaled that the central bank’s extended period of lowborrowing costs may get even longer.
Bernanke said “significant economic challenges remain,”with lending constrained and the jobless rate above 10 percent.Speaking in New York yesterday, he said U.S. asset prices aren’tout of line with underlying values, and central bank policy willensure that the “dollar is strong.”
Treasury two-year notes rose and the dollar weakened asinvestors reduced bets the Fed will raise interest rates byAugust. In his most extensive comments on the economy sinceJuly, Bernanke repeated the Fed’s Nov. 4 pledge to keep rateslow for an “extended period,” and he said forecastersanticipate “moderate” growth this quarter after the 3.5percent pace of expansion in the prior three months.
The Fed chief wants to “keep the liquidity spigot wideopen for some time to come,” said Stephen Stanley, chiefeconomist at RBS Capital Markets in Stamford, Connecticut.“Bernanke just locked the Fed into an easy monetary policy, atleast in the short term, so any implicit threat of response todollar declines simply has zero credibility.”
Traders trimmed wagers on Fed interest-rate increases nextyear, placing September as the most likely move instead ofAugust, based on futures on the Chicago Board of Trade.
Dollar, Stocks
The yield on the two-year Treasury note fell four basispoints, or 0.04 percentage point, to 0.77 percent yesterday inNew York after touching 0.76 percent, the lowest level sinceJan. 23. Stocks held gains, with the Standard & Poor’s 500 Indexjumping 1.5 percent to 1,109.3, a 13-month high.
The Dollar Index, which IntercontinentalExchange Inc. usesto track the greenback’s value against six major currencies,touched 74.679, the lowest level since August 2008.
The labor market is an “area of great concern,” Bernanke,55, a former Princeton University economics professor, toldfinancial executives in Manhattan at a luncheon hosted by theEconomic Club of New York.
“Jobs are likely to remain scarce for some time, keepinghouseholds cautious about spending,” he said. While payrollswill increase as the economy recovers, unemployment “likelywill decline only slowly if economic growth remains moderate, asI expect.”
When Bernanke testified before Congress for two days inJuly for the Fed’s semiannual report on monetary policy, heelaborated on the central bank’s plans to unwind itsunprecedented monetary stimulus, including raising interestrates from almost zero.
Exit Strategy
Yesterday, he devoted one sentence of his speech to theFed’s exit strategy, saying in part that the central bank “willcalibrate the timing and pace of any future tightening to bestfoster maximum employment and price stability.”
Since his July testimony, U.S. employers have eliminated867,000 more jobs, and the unemployment rate climbed to a 26-year high of 10.2 percent in October from 9.5 percent in June.
“It’s going to be a very long time before the Fed startsusing any tightening measures,” David Resler, chief economistat Nomura Securities International Inc. in New York, said in aBloomberg Television interview. “Normally if we come out of arecession of the sort that we had, we should be talking about 7,8 or 9 percent growth, and no one’s talking about that.”
In a question-and-answer session after the speech, Bernankesaid it’s “not obvious” that asset prices in the U.S. are outof line with underlying values after a 64 percent jump in theS&P 500 Index from its March low.
‘Fundamental Value’
“It is inherently extraordinarily difficult to knowwhether an asset’s price is in line with its fundamentalvalue,” Bernanke said. “It’s not obvious to me in any casethat there’s any large misalignments currently in the U.S.financial system.”
Fed Vice Chairman Donald Kohn, in a speech yesterdayevening, echoed those remarks.
“The prices of assets in U.S. financial markets do notappear to be clearly out of line with the outlook for theeconomy and business prospects as well as the level of risk-freeinterest rates,” Kohn said at Northwestern University inEvanston, Illinois.
Bernanke and Kohn didn’t address complaints from officialsin Asia that low U.S. interest rates are fueling surging pricesof commodities as well as financial assets in emerging markets.
The price of gold has climbed 54 percent in the past yearto $1,139.50 an ounce, reaching a record yesterday for thefourth time in six sessions. Crude oil is up 77 percent in 2009.
Bank of Japan Governor Masaaki Shirakawa said yesterdaythat emerging economies “might overheat and experiencefinancial turmoil.” A day earlier Liu Mingkang, China’s topbanking regulator, called risks from low rates and the dollar’sweakness “new, real and insurmountable.”
To contact the reporter on this story:Scott Lanman in Washington at slanman@bloomberg.net.
Last Updated: November 17, 2009 00:00 ESTSource: Bloomberg
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