Washington – Federal Reserve Chairman Ben Bernanke offered a mostly upbeat assessment of the economy Wednesday, citing housing and inflation improvements in comments suggesting that the Fed will leave interest rates alone for a while.
Bernanke said that at present, interest rates are at a level that is “likely to foster sustainable economic growth and a gradual ebbing of core inflation.”
“Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes,” he said as he delivered the Fed’s economic report for the first time to a Democrat-controlled Congress.
The Fed has held the benchmark federal funds rate at 5.25 percent since August, giving borrowers a reprieve.
Before that, the central bank had steadily raised interest rates for two years, the longest stretch of hikes, to fend off inflation.
Many economists said Bernanke’s testimony to the Senate Banking, Housing and Urban Affairs Committee buttressed their belief that the Fed will continue to hold rates steady for much of this year.
Still, Bernanke was not prepared to declare victory over inflation just yet. Thus, he did not close the door on the possibility of further rate increases down the road.
The Fed chief was careful to hedge his bets and pointed out risks that could upset the generally good economic outlook.
One is that inflation might flare, which is why the Fed is keeping open the option of a rate increase.
It will “be some time before we can be confident that underlying inflation is moderating as anticipated,” Bernanke said.
If inflation does not wane as the Fed expects, policymakers are “prepared to take action,” he said.
In its latest economic projections, the Fed said it expects the economy this year to grow between 2.5 percent and 3 percent, as measured from the fourth quarter of last year to the fourth quarter of this year. That would be slower than a previous Fed forecast and less than the 3.4 percent growth logged for all of 2006.
“Core” inflation, excluding volatile categories of energy and food, should ease to between 2 percent and 2.25 percent, which would be down from 2.3 percent last year.
The unemployment rate may rise to a high of 4.75 percent, still low by historical standards.
