by William Neikirk
Federal Reserve Chairman Ben Bernanke signaled once again today that the central bank likely will hold interest rates steady as surging oil prices threaten to push up inflationary expectations amid a severe housing correction.
He said he did not see a recession on the horizon. And, he added, he said he was not overly concerned that China would reduce its holdings of U.S. assets.
He conceded that financial market volatility have persisted since the central bank reduced interest rates by one-quarter of one percent at the end of October, as a number of large financial institutions have reported losses from their holdings of mortgage-backed securities.
In key testimony before Congress’ Joint Economic Committee, the Fed chief repeated that the central bank’s current policy–that the current level of interest rates will serve to balance “the upside risks to inflation and downside risks to growth.”
Several members of the panel expressed their concern about the current state of the economy and financial markets. Sen. Charles Schumer (D-N.Y.), the chairman, said he was worried about a storm of economic trouble.
“I think we are at a moment of economic crisis stemming from four key areas: Falling housing prices, lack of confidence in creditworthiness, the weak dollar and high oil prices,” Schumer said.
In his prepared remarks, Bernanke conceded that the economy will slow down from its strong third-quarter performance and that problems in the “subprime” mortgage market will likely intensify.
Both consumer and business spending could slow in coming months, he said, and economic growth will remain sluggish through the first part of 2008 before “strengthening as the effects of tighter credit and the housing credit began to wane.”
The fact that oil prices are nearing $100 a barrel also gave the Fed chairman pause, as did the recent decline in the value of the dollar. He said these factors are likely to lead to increase inflation in the short run. And, if inflation expectations become “unmoored,” they could boost long-term inflation as well, Bernanke said.
Since it made its decision to cut interest rates in October, Bernanke said recent economic data “have continued to suggest that the overall economy remained resilient in recent months.”