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WASHINGTON (AFP) –
Federal Reserve chairman Ben Bernanke signaled that the US central bank was not yet ready to abandon its ultra-low interest rates as it tried to keep a tentative economic recovery on track.
The Fed chairman, in his semiannual report to Congress on Wednesday, said he saw unemployment remaining stubbornly high, which would require the Fed to stay on a stimulative path, doing little to change monetary policy.
The report came after last week's surprise increase in the discount rate for emergency bank loans prompted speculation that the Fed might be moving faster than anticipated to a tighter monetary stand.
In the House of Representatives Financial Services Committee, Bernanke said the economy had begun to show growth in the second half of 2009 after a massive stimulus effort from the Fed and the US government.
But he said the recovery "probably will be tempered by households' desire to rebuild wealth, still-tight credit conditions facing some borrowers, and, despite some tentative signs of stabilization, continued weakness in labor markets."
Because of these headwinds, Bernanke said that economic conditions are "likely to warrant exceptionally low levels of the federal funds rate for an extended period," repeating a key phrase used by the central bank.
Bernanke was to appear Thursday for a second day of testimony on the report before the Senate Banking Committee.
The Fed has kept its base rate in a range of zero to 0.25 percent for more than a year as part of massive effort to spark recovery. A variety of other programs to restore credit flows are gradually being wound down.
The central raised its discount rate for emergency bank loans a quarter point on Friday but indicated that this was not a sign of tightening of overall policy.
Stocks rallied on Bernanke's comments while the dollar fell.
"Dollar bulls were sorely disappointed by Bernanke's comments," said Kathy Lien at Global Forex Trading.
"At minimum, traders wanted to hear optimism from the Fed Chairman but unfortunately his comments were subdued.
"With many Americans still out of work, it would have been politically unsavvy for Bernanke to appear overly optimistic, knowing that members of Congress will be criticizing the pace of recovery in an election year where their constituents face near-double-digit unemployment."
Ian Shepherdson at High Frequency Economics said Bernanke "seems to have been determined to offer interest rate hawks as little as possible."
Bernanke's comments calling the recovery "nascent" and attributing the upturn to temporary factors aimed to temper optimism, he said.
Bernanke reiterated that the Fed had an exit strategy to avoid a surge in inflation when the economy recovers, but was not ready to use this.
"The Federal Reserve is taking steps to ensure that it will be able to smoothly withdraw extraordinary policy accommodation when appropriate," he said.
The Fed was readying a variety of tools, including the rate it pays on bank deposits at the Fed, to mop up liquidity in the financial system, he added.
"Bernanke talked about the exit strategy but emphasized how much the economy still needed low interest rates," said Robert Brusca at FAO Economics.
"Apparently the discount rate move was just a very early test of the markets arguably done at a time that the economy was too weak to get anyone cranked up in a serious way about more rate hikes to come."
