Bernanke warns that US upturn will be frail

Federal Reserve chairman signals no early move to tighten policy but reassures lawmakers and markets over inflation risks

 Gary Duncan, Economics Editor

An emerging US recovery is likely to remain frail into 2011, leaving the Federal Reserve loathe to begin withdrawing its unprecedented economic stimulus measures at any time soon, Ben Bernanke said today.

The Fed Chairman, delivering his twice-yearly testimony to the US Congress, said that American unemployment was set to remain high into the year after next. This could sap fragile consumer confidence and undermine what was likely in any case to be a fragile and anaemic recovery, he warned.

In a clear signal that the Fed will be in little hurry either to raise official US interest rates or withdraw the huge amounts of extra money it has pumped into the American economy, Mr Bernanke said that the Fed’s policy-setting Open Market Committee “believes that a highly accommodative stance of monetary policy will be appropriate for an extended period”.

However, the Fed Chairman also sought to soothe markets’ nervousness that too lax an approach by the US central bank could ignite an inflationary explosion in the medium-term.

He emphasised in his remarks to the House of Representatives’ Financial Services Committee, and in an article in the Wall Street Journal hat the Fed would move to withdraw its massive economic stimulus in “a smooth and timely manner”.

Mr Bernanke sought to make clear in his article in the Journal that the Fed is confident that it can rein-in any inflationary pressures that emerge as recovery takes hold.

“The [Fed] is devoting considerable attention to issues relating to its exit strategy, and we are confident that we have the necessary tools to implement that strategy when appropriate,” he wrote. “Should economic conditions warrant a tightening of monetary policy before this process of unwinding is complete, we have a number of tools that will enable us to raise market interest rates as needed.”

The Fed chairman made clear that by increasing the amount of interest it pays to banks on their reserves held with the central bank it had the ability quickly to curb institutions’ readiness to lend and so quell any emerging inflationary pressures. (Gary Duncan, The Times).  http://business.timesonline.co.uk/tol/business/economics/article6722090.ece

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