Bernanke Tells Congress Fed May Need to Raise Rates (Update3)
Feb. 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke, in his first report to Congress, said the U.S. economy is in a sustained expansion that may require additional interest rate increases to restrain inflation.
``The economic expansion remains on track,'' he said in the text of testimony to the House Financial Services Committee. In addition to high energy prices, ``another factor bearing on the inflation outlook is that the economy now appears to be operating at a relatively high level of resource utilization.''
Bernanke described an economy that is in a durable expansion, using up available resources in productive capacity and labor markets. Additional rate increases may be necessary to keep inflation in check if economic data continue to come in stronger than expected, he said.
``The risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately -- in the absence of countervailing monetary policy action -- to further upward pressure on inflation,'' Bernanke said.
Bernanke, 52, said he concurred with the assertion in the Fed's Jan. 31 policy statement that ``some further firming of monetary policy may be necessary.''
The Fed lifted its target rate 14 times since June 2004 to 4.5 percent, and Bernanke's remarks matched the expectations of traders who anticipated he would signal further increases. The yield on the two-year U.S. Treasury note held near a five-year high, at 4.69 percent at 11:57 a.m. in New York.
`Status Quo'
Bernanke became chairman two weeks ago, succeeding Alan Greenspan, who ran the central bank for almost two decades. The hearing is Bernanke's first opportunity to lay out the Fed's forecasts and describe his own approach as head of the world's most influential central bank. He endorsed Greenspan's risk-management approach, without using that term, and said policy must be conducted with ``rigorous analysis informed by sound economic theory.''
``More tightenings are in the pipeline,'' said Anthony Chan, chief economist at JPMorgan Chase & Co.'s private client services group in Columbus, Ohio. ``Bernanke is working very hard to promote continuity by maintaining to a large degree the status quo that was in place at the Federal Reserve.''
Dependent on Data
The transition of the chairmanship occurred with the economy in its fifth year of expansion, and with the unemployment rate at 4.7 percent in January, the lowest in more than four years. The government reported yesterday that retail sales rose 2.3 percent in January, the fifth straight monthly increase.
``It is clear that substantial progress has been made in removing monetary policy accommodation,'' Bernanke said in his text. Policy makers in coming quarters ``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.''
The new Fed chairman cited the slowing housing market as one risk to the expansion, although he said a ``moderate softening'' seemed more likely than a ``sharp contraction.''
``There are some straws in the wind that housing markets are cooling a bit,'' Bernanke said in response to a question during his testimony. ``If the housing market does cool more or less as expected, that would still be consistent with a strong economy.''
Wagers on Rates
Sales volumes are slowing in the market for existing homes, and prices are lower for new dwellings. Sales of previously owned homes fell 5.7 percent to a 6.6 million annual rate of increase in December, the lowest since March 2004.
Economists expect new home prices to slide another 1.5 percent next year, according to the consensus estimate from a survey by Blue Chip Economic Indicators, following a 3.5 percent decline this year. A record 1.282 million new homes sold in 2005.
Traders in federal funds futures contracts are pricing in nearly a 100 percent probability that the U.S. central bank raises interest rates March 28, Bernanke's first meeting as chairman of the Fed's rate-setting Open Market Committee. Before today's testimony, futures markets had shown expectations for just one more rate increase in 2006 beyond March.
Low long-term interest rates have not risen in tandem with the 3.5 percentage point rise in the central bank's policy rate in 14 consecutive increases since June 2004.
Global Savings
Bernanke said the decline in long-term yields resulted from ``an excess of desired global saving'' in addition to lower perceptions of risk of ``unforeseen changes in real interest rates and inflation.''
Treasury notes maturing in 2 years yield 4.68 percent above the 4.61 percent yield on 10-year Treasury maturities, resulting in a so-called inverted yield curve. The 10-year note's yield is almost unchanged from 4.58 percent in June two years ago, when the Fed began the current series of rate hikes.
Fed officials still view persistently high energy prices, combined with a 4.7 percent unemployment rate, as an inflation risk, according to their statement and public remarks.
The central bank's preferred inflation benchmark, the personal consumption expenditures price index, minus food and energy, rose at a 2.2 percent annualized rate over the past three months, around the high end of the ranges of those policy makers who have expressed a preference.
``Inflation pressures increased in 2005,'' Bernanke said. ``Steeply rising energy prices pushed up overall inflation, raised business costs, and squeezed household budgets.''
Still, ``long term inflation expectations appear to have been contained.''
Energy Prices
Oil prices are up 30 percent over the past 12 months. Retail prices for unleaded gasoline are up 20 percent, according to the American Automobile Association.
Among the factors inhibiting the pass-through of energy prices into the prices of non-energy goods and services are ``advances in productivity as well as increases in nominal wages and salaries that, on balance, have been moderate.''
Despite moderate wage growth, ``the financial health of households appears reasonably good,'' Bernanke said.
Productivity, or output per hour, rose 2.7 percent last year, the slowest since 2001, following a 3.4 percent gain in 2004. Unit labor costs rose 2.4 percent last year, the most since 2000, after a 1.1 percent increase in 2004.
To contact the reporter on this story: Craig Torres in
Washington at
ctorres3@bloomberg.net
Last Updated: February 15, 2006 12:10 EST
