The Fed will act on inflation but sees no risks to growth
Washington - June 11, 2008 - The chairman of the U.S. Federal Reserve, Ben Bernanke, noted that the agency will fight vigorously growing inflation, while energy costs soar hand in hand with the hike of oil. Bernanke also minimized data last week showed that the unemployment rate jumped from 5.1 to 5.5% in May-its largest increase in 22 years, saying that the risks of a substantial deterioration in the U.S. economy is were fading. After these words, the market looks closer to a rise of rates.
Bernanke's statements suggest that inflation is occupying a more prominent place on the radar of the Fed, indicating a minimum intention of cutting interest rates, which has provoked the reaction of the dollar.
"The latest round of increases in energy prices has joined the upside risks to inflation and inflationary expectations," Bernanke said in prepared statements for a conference organized by the Federal Reserve of Boston in Chatham, Massachusetts.
The average price of gasoline in the United States has just more than $ 4 per gallon for the first time in history.
"The Federal Open Market Committee will resist strongly the erosion of inflation expectations of long-term, as a non-anchor of these expectations would be destabilizing for both growth and for inflation," Bernanke said. The dollar rose to a maximum of 3 months against the yen and Treasury bonds plunged following statements by Bernanke.
Don`t think that growth is at risk
Bernanke, however, believed moreover that despite the recent bad news on the unemployment front, recent economic indicators had not affected but "modest" prospects for growth.
"The risk that the economy faces a slowdown appears to have decreased substantially in the last month," judged.
The warning from Bernanke on inflation, the third in just one week, seem to approach the faction of the Committee that most mistrusts inflation, led by the chairmen of the Federal Reserve Bank of Dallas and Philadelphia, Richard Fisher and Charles Plosser .
Fisher said the channel CNBC on Monday that a weak dollar could lead to a vicious circle of higher inflation and slower growth. However, several analysts have expressed scepticism about the harsh statements on the rise in prices will be underpinned by genuine action, in the form of higher interest rates.
His speech also pointed to the growing nervousness in the Fed on recent rises in oil prices, which have prompted the crude to touch a record above 139 dollars per barrel last week.
Bernanke said that inflation remained high, reflecting the costly raw materials. At the same time, he explained, the increased costs of these materials have not yet translated into higher prices of products or the need to increase wages.
But the manager cautioned that there is no guarantee that the situation continues like this. "The continuation of this structure is not guaranteed, and future developments in this regard will be followed closely," he said.
Interpretation
Bernanke's words have been interpreted as an advance of possible rises in U.S. rates. The markets begin to discount because after the summer is very likely that the Fed begins to desandar part of the path in terms of interest rates applied to the downturn and increase the price of money, especially if proved, as cree Bernanke, that the U.S. economic crisis will be less deep of what was thought, and that this economy is going to be able to avoid recession.
"The Fed is conducting a fine stock of the situation facing the economic slowdown and rising inflation," says a Bloomberg Gary Schlossberg, economist for Wells Capital Management. "Bernanke's speech increases the chances that the next move in rates is an increase," he adds.
Source: El Economista