Bernanke Testifies Before Congress
Federal Reserve Chairman Ben Bernanke testified before the Senate Banking Committee in his semi-annual Monetary Policy report to Congress. In a sharp turn around from June when he claimed downside risks to growth had diminished, the recent turmoil in financial markets has led the Fed to abandon the economic forecast it made just last month.
At present, accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policy makers. The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth.
At the same time, upside risks to the inflation outlook have intensified lately, as the rising prices of energy and some other commodities have led to a sharp pickup in inflation and some measures of inflation expectations have moved higher. Given the high degree of uncertainty, monetary policy makers will need to carefully assess incoming information bearing on the outlook for both inflation and growth.
In light of the increase in upside inflation risk, we must be particularly alert to any indications, such as an erosion of longer-term inflation expectations, that the inflationary impulses from commodity prices are becoming embedded in the domestic wage- and price-setting process.
For the last couple of months speculators believed that the central bank would raise rates by September but the deepening crisis for financial markets leaves many in doubt whether they will raise rates at all this year. That means higher energy prices will remain largely unchecked and the prediction of $180 a barrel price for oil by year’s end could be quite possible.
The housing market isn’t getting any better and many financial institutions are stuck with mortgage assets that nobody wants. The financial sector has already raised hundreds of billions of dollars in capital to cope with writedowns from the subprime collapse but how much more can they realistically raise before investors get tired of throwing good money after bad?
Imagine how bad the economy would really look right now if it wasn’t for the economic stimulus payments that went out in May. Consumer spending is being sustained by that right now, but that tap will be running out in another couple of months.
Basically the Fed isn’t going to worry about inflation until people’s paychecks start going up like the price of everything else is. So while large financial institution will garner most of their attention, middle class America will remain the big loser during this economic downturn.
