Bernanke foresees no rise in interest rates soon
By
Paul Davidson, USA TODAY
Moving to defuse concerns that an interest rate rise could be just a few months away, Federal Reserve Chairman Ben Bernanke told Congress Wednesday he expects rates to stay "exceptionally low" for an "extended period."In his semiannual report to the House Financial Services Committee, Bernanke cited high unemployment, "subdued inflation trends and stable inflation expectations" as reasons for keeping its fed funds rate near zero. "That's significant," says James O'Sullivan, chief economist of MF Global. He says it likely means the Fed won't boost its benchmark rate until late fall. Similar language has been commonplace in Fed statements during the recession.
But signs that the recovery is gaining traction — along with the Fed's move last week to bump up interest rates on loans to banks — have fueled predictions that borrowing costs for consumers may soon rise. The Fed last week raised the discount rate it charges banks for emergency loans by a quarter point, prompting a sell-off in stock and bond markets. But Bernanke reiterated Wednesday that the increase in the discount rate is "not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change" in monetary policy.
He added that policymakers expect the economy to grow a "moderate" 3% to 3.5% this year and about 4% in 2011. Unemployment, he said, will fall slowly from January's 9.7%, remaining at 6.5% to 7.5% by the end of 2012. Inflation should stay low — 1% to 2% — through 2012. The recovery's fragility was underscored Wednesday as new home sales tumbled to a seasonally adjusted annual rate of 309,000 in January.
To jump-start the economy and lower mortgage rates, the Fed is buying $1.75 trillion in mortgage-backed securities, Treasury bonds and other debt. It plans to end mortgage security purchases by March 31. Some economists fear that will drive up mortgage rates. Bernanke said the Fed will "continue to look at" whether more purchases are needed. But he noted the Fed will still hold $1.25 trillion in mortgage notes.
That in itself, he said, should keep rates "below what they otherwise would be." Others worry the plethora of Fed-infused cash in markets will spark inflation. Bernanke said the Fed has tools to reclaim the money, including selling securities with agreements to buy them back later.
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