Bernanke Expects Better Recovery, Stable Inflation In 2011

Federal Reserve Chairman Ben Bernanke testified before a Senate hearing today, citing Middle East instability as a reason for modest recent price increases, consistent with the predictions of private forecasters.

Bernanke noted an unwavering commitment to price stability and a rate of inflation  consistent with the Federal Reserve’s mandate. He expressed mild concern regarding deflation, but noted that inflation would stay stable at 1.75% for the remainder of the year, with inflation between 1 and 2 per cent expected for 2012.

He expressed that even with moderate economic growth, unemployment would stay high for multiple years before returning to more normal levels. He expected unemployment levels of between 7.5 per cent and 8 per cent by the end of 2012.

Bernanke noted that the economy had grown for seven consecutive quarters, and that in the last quarter, real GDP actually matched the pre-crisis peak. Nevertheless, he conceded that job growth remains relatively weak, and unemployment is still high.

He considers an inflation rate of 2 per cent as consistent with international standards, and desires removing risk from deflation by maintaining that consistent rate of 2 per cent.

Bernanke attributed the economy’s recovery thus far to the stabilisation of the financial system, with businesses rebuilding previously depleted inventories. He also pointed out that European debt problems roiled financial markets.

Bernanke cited increases in commodity prices as a result of rising global demand for raw materials in emerging markets, with constraints on global supply.

That being said, cost pressures from these commodity prices have been offset by stability in labour prices, leading to a modest increase in consumer price inflation that is consistent with most private forecasters.

He confirmed that sustained price rises would be a threat both to economic growth and price stability.

Bernanke noted that depositing institutions have high reserve balances with the Federal Reserve, and commented that the Fed’s ability to pay interest meant the Fed would be able to tighten monetary policy where required, with a purpose of ensuring price stability.

Bernanke noted the Fed’s unwavering commitment to both price stability and a rate of inflation consistent with the Fed’s mandate of both price stability and maximum sustainable employment.

He pointed out that a combination of rising household prices, higher business confidence, and effective monetary policy meant a better economic recovery in 2011 was expected as compared with 2010.

— Gary Cassady

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