Ben Bernanke
Inflationary pressures as a result of soaring oil and food prices and higher living costs suggest the US could be heading towards stagflation, according to the US Federal Reserve chairman Ben Bernanke.
In his semi-annual assessment to the House Financial Services Committee this week, Bernanke was decidedly downbeat in his evaluation of the US economy.
Bernanke said the US was facing the risk of little or no growth, more financial market freeze ups and rising inflation, which combined would raise the level of unemployment and leave many home and business borrowers without funds to borrow.
“The economic situation has become distinctly less favourable,” Bernanke said.
He also suggested the Fed was prepared to reduce interest rates further: “We will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner … to support growth and to provide adequate insurance against downside risks.”
In his address to the congressional panel, Bernanke admitted that the Fed viewed stalled US economic growth and a collapse in some parts of the financial market as so serious that it would probably continue cutting interest rates, even if that meant risking further fuelling inflation.
Bernanke’s bleak assessment of the US economy was in contrast to his previous upbeat report to Congress in July 2007 when he said the sub-prime mortgage crisis and the US housing slump were largely contained and would not spill over to the broader economy, which has not been the case, resulting in today’s credit squeeze.
Bernanke confirmed that US economic activity was expected to remain soft in the near term but predicted it to pick up later this year — supported by monetary and fiscal stimuli.
Total inflation was expected to be lower in 2008 than in 2007 and to edge down further in 2009. However, Federal Reserve board members and presidents believed that considerable uncertainty still surrounded the outlook for economic growth and the risks around that outlook were skewed to the downside.
According to US analysts, the Fed is poised to reduce official interest rates by another half-point when it meets on March 18.
