In Australia, Reserve Bank staff have been briefing a visiting economist on their views, which are apparently still undecided (see “RBA kiss’n’tell“).

The Oz brings us today a report from the FT on Ben Bernanke’s latest congressional testimony. Clearly a better way to communicate than via a private briefing for a visiting economist who makes his living by trading opinions:

Ben Bernanke challenged market expectations of early US interest rate cuts, telling a congressional committee he remained comfortable with rates on hold despite recent adverse economic data.

The Fed’s recent policy statement – which baffled markets when it was released a week ago – was not intended to signal that the Fed now had a neutral policy stance, he said.

I want to emphasise that we have not shifted away from an inflation bias,” he said. On the factors influencing inflation, “It is encouraging that inflation expectations appear to be contained.

However, most other effects on inflation are more worrying.

  • Increases in rents–both market rent and owners’ equivalent rent–account for a substantial part of the increase in core inflation over the past year.
  • The rate of resource utilization is high, as can be seen most clearly in the tightness of the labour market.
  • There is a high level of resource utilization, and
  • Core inflation is above the levels most conducive to the achievement of sustainable growth and price stability

Uncertainty is higher than usual (as it is whenever one is discussing the future) but core inflation … “seems likely to moderate gradually over time”.

Energy prices are one reason for high uncertainty. “Despite recent increases in the price of crude oil, energy prices are below last year’s peak. If energy prices remain near current levels, greater stability in the costs of producing non-energy goods and services will reduce pressure on core inflation over time. Of course, the prices of oil and other commodities are very difficult to predict, and they remain a source of considerable uncertainty in the inflation outlook”.

The Fed is also concerned at the prospects for economic activity. Real GDP has been growing at an annual rate of around 2 per cent. “Overall, [despite risks in both directions] the economy appears likely to continue to expand at a moderate pace over coming quarters”.

Read more at Henry Thornton.

Peter Fray

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