--> Fed's Bernanke says easy US money stance appropriate

Reuters, 01.04.04, 5:31 PM ET

WASHINGTON, Jan 4 (Reuters) - While the U.S. economy appears to have turned a corner, the Federal Reserve is right to hold interest rates at 45-year lows given the low rate of underlying inflation, a top Fed official said on Sunday.

"The Federal Reserve enters 2004 with monetary policy that is unusually accommodative in historical terms, relative to the stage of the business cycle," Fed Governor Ben Bernanke said in remarks prepared for delivery at the annual meeting of the American Economic Association in San Diego.

"That accommodation is justified, I believe by the current very low level of inflation, and by the productivity gains and the weakness in the labor market, both of which suggest that inflation is likely to remain subdued," he said.

A copy of his remarks was released in Washington.

The U.S. central bank has held the benchmark overnight lending rate at 1 percent -- its lowest since 1958 -- since June and has said it expects to keep rates low"for a considerable period."

Officials have made clear they want to put a floor under already low inflation. Stripping out volatile food and energy prices, consumer prices have risen 1.1 percent in the 12 months through November, the slowest in nearly 38 years.

"Inflation is not simply low; for my taste, it is very nearly at the bottom of the acceptable range," Bernanke said.

However, some economists fear rising commodity prices and a falling dollar presage future rising prices, and they have begun to question the wisdom of the Fed's low-rate stance.

Bernanke said those concerns were being heard in the halls of the central bank, but that the worries were misguided.

"Rising commodity prices are a better signal of strengthening economic activity than of inflation at the consumer level," he said, adding that raw material prices are just a small portion of business costs.

He said a sharp gain in gold prices reflected weakness in the dollar and geopolitical tensions.

As for the dollar, Bernanke said while it has fallen sharply against the euro it has fared better against a wide range of currencies. He noted a broad dollar index stood about 7 percent above its 1990s average and 17 percent above the low it reached in 1995.

"Moreover, the direct effects of dollar depreciation on inflation, like those of commodity price increases, appear to be relatively small," he said.

While arguing an unusually stimulative policy stance was still warranted, Bernanke voiced optimism on the economy.

"2003 seems to have marked the turning point for the U.S. economy, and we have reason to be optimistic that 2004 will see even more growth and continued progress in reducing unemployment," he said. He added that he would not be surprised if the economy expanded at a rate of over 4 percent this year.

Still, he said downside risks remained and that the Fed should take care in considering when to raise rates.

"In particular, it is important that we ensure, as best we can, that the current expansion will become self-sustaining and that the inflation rate does not fall further," Bernanke said."For now, I believe that the Federal Reserve has the luxury of being patient."

He said the jobs market appeared even weaker than the unemployment rate, which dipped to 5.9 percent in November, would suggest, saying it appeared many workers who had lost their jobs were leaving the job market.

Bernanke said gains in productivity, or worker output per hour, were likely to slow from their breakneck third quarter pace, when they roared ahead at a 9.4 percent annual rate.

That would push up unit labor costs, an important gauge of wage pressures, but Bernanke said inflation could still slow if businesses could not pass on their rising costs to consumers.

Copyright 2004, Reuters News Service


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