Bernanke Today: Economy and the Dollar

Fed Chairman Ben Bernanke commented on the economy today.

Outlook:

Broadly speaking, the functioning of financial markets has improved of late, but conditions remain strained and some key funding and securitization markets have shown only tentative signs of recovery. Some borrowers, such as highly-rated corporations, retain good access to credit, but credit conditions generally remain restrictive in areas related to residential or commercial real estate.

Residential construction continues to contract, and the overhang of unsold new homes remains large, although it has declined some in absolute terms. Consumer spending has thus far held up a bit better than expected, but households continue to face significant headwinds, including falling house prices, a softer job market, tighter credit, and higher energy prices, and consumer sentiment has declined sharply since the fall. Businesses are also facing challenges, including rapidly escalating costs of raw materials and weaker domestic demand. However, the strength of foreign demand for U.S. goods and services has offset, to some extent, the slowing of domestic sales.

Overall economic growth was quite slow but apparently positive in both the fourth quarter of 2007 and the first quarter of this year. Activity during the current quarter is also likely to be relatively weak. We may see somewhat better economic conditions during the second half of 2008, reflecting the effects of monetary and fiscal stimulus, reduced drag from residential construction, further progress in the repair of financial and credit markets, and still solid demand from abroad. This baseline forecast is consistent with our recently released projections, which also see growth picking up further in 2009. However, until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside. Recent increases in oil prices pose additional downside risks to growth.

Inflation has remained high, largely reflecting continued sharp increases in the prices of globally traded commodities. Thus far, the pass-through of high raw materials costs to domestic labor costs and the prices of most other products has been limited, in part because of softening domestic demand. However, the continuation of this pattern is not guaranteed and will bear close attention. Futures markets continue to predict--albeit with a great range of uncertainty--that commodity prices will level out, a forecast consistent with our expectation of some overall slowing in the global economy and thus in the demand for raw materials. A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation, consistent with the projections of Federal Reserve governors and Reserve Bank presidents for 2009 and 2010. Unfortunately, the prices of a number of commodities, most notably oil, have continued upward recently, even as expectations of future policy rates and the foreign exchange value of the dollar have remained generally stable in the past few months. The possibility that commodity prices will continue to rise is an important risk to the inflation forecast. Another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self-confirming.

Perhaps the most important paragraph was the third from the end:

In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations. Over time, the Federal Reserve's commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy--including flexible markets and robust innovation and productivity--will be key factors ensuring that the dollar remains a strong and stable currency.

This is the most that has been said on the dollar since Bernanke has taken office. For those of us who feel oil prices would come down substantially should the dollar strengthen, it is good news. It mean Ben will begin to focus on that as a monetary tool rather than simple rate adjustments.

Read the full transcript here.

Comments

[theinvestingspeculator]

You can't talk up the dollar. It is going up because it is over sold. For the dollar to go up, America must stop over consuming.
theinvestingspeculator...

[Whidbey]

Tell us how the monetary tool works in regard to the dollar without a direct trade-off with inflation. Don't mumble "sanitize or targeted policy" because we know that just the talk of money managers, not action.

Your hope for oil prices to fall is not realistic, or based on the facts of supply and demand. What happens to lessen the price of oil that will not just increase demand? My God what do you think the Fed is?

[iThinkBig]

You got it Whidbey. If we want a stronger dollar, give the global consumer more cost effective energy. The U.S. not Brazil should be capturing the lion's share of this market. Taken a look at Brazil's currency from ten years ago to today? It's quite an interesting chart.

So far, it's only private investors leading the charge with Washington being an inhibitor to creation of competing petroleum products. Devaluing the currency as a governmental policy is a trademark of non-sustainable debt.

The dollar crashing is a reflection of our poor choice in economic policy reflected with facts on the ground and net result of foreign investors moving away from the U.S. (for now). Foreigners nations have built there own wealth funds and are make higher returns then servicing our public debts. It was Washington arrogance and lack of research to assume that would continue forever just because they are pegged to the dollar.

Now the U.S. taxpayer pays the price, and the globe knows the how our financial system got to this point and the additional shocks it must undergo before we innovate our way out of this mess. Right now, the three bozos running for President have no real plan for energy independence to get global investment back into the U.S. financial system. Senators are pointing fingers with raised voices at big oil and soverign wealth funds when we should be selling the customer what they want and that is affordable energy. Beyond ignorant...

[droskoph]

Dollars are going up because of the credit implosion - they're fewer of them. This is deflation inaction. Look around to see how many things that you neither consume or combust are going up.