For months, America's central bankers hinted gently and otherwise that they were unlikely to reduce interest rates in the near future, despite widespread market expectations to the contrary. Now that investors have come to believe them, Ben Bernanke, the Federal Reserve chief, is telling the world that a rate increase also is not in the cards.
Without sounding self-congratulatory, the Fed chairman, in his semiannual report to Congress, appeared to be saying that the central bank's current position is the correct one and that it would not alter its stance until it sees evidence that the American economy is not growing at a comfortable rate.
Since July, the Fed has held rates on the overnight loans known as federal funds at 5.25%. The central bankers had previously raised rates for two years, taking away the easy-money policy they put in place after the bursting of the stock-market bubble in 2000 and the Sept. 11 terrorist attacks the following year.
Bernanke's testimony on Wednesday continued "the incremental reduction in hawkishness evident in the past few months" in official statements from the central bank's policy-setting Federal Open Market Committee, "though there is nothing here that could be legitimately described as outright dovish," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
Drew Matus, senior economist at Lehman Bros., said the Fed chairman's testimony indicated that the central bank is pretty happy with the current economic situation. "If anything, it tells us they need proof that they're wrong and that the Fed is likely to stay on hold for some time," he said.
Speaking before the House Banking Committee, Bernanke said inflation remains the central bank's "predominant concern," in part because of volatile energy prices.
Largely echoing the Fed's statement following the most recent FOMC meeting, Bernanke said that he is "prepared to take action to address inflation risks if developments warrant." Nonetheless, while core inflation "remains somewhat elevated," he said rising prices appear to have ebbed since the beginning of 2006.
"Overall inflation has fallen, in large part as a result of declines in the price of crude oil," he said.
Bernanke predicted that real gross domestic product would increase by roughly 2.5% to 3% in 2007 and 2.75% to 3% in 2008. He expects core inflation excluding food and energy to be 2% to 2.25% in 2007 and 1.75% to 2% in 2008.
The Fed's semiannual economic forecasts are often perceived as targets by investors. As long as inflation stays close to the 2% level and economic growth does not fall below 2.5%, the central bank seems unlikely to find cause to alter interest rates.
By late morning, Bernanke's testimony lifted the stock market. The Dow Jones industrial average rose 61.61 points, or 0.5%, to 12,716.46, while the tech-heavy Nasdaq jumped 24.18 points, or 1.0%, to 2,484.06. The more broad-based Standard & Poor's 500 increased 8.94 points, or 0.6%, to 1,453.20.
Interest-sensitive sectors such as banking and homebuilding saw strong gains. Shares of
Bond prices also rose, pushing interest rates lower, as the threat of Fed action to tighten credit receded. The yield on the benchmark 10-year Treasury note fell to 4.73%, from 4.79%, late Tuesday.