Bernanke Discusses Possible Interest Rate Increases, Overall State of the Economy

Ben Bernanke replaced Alan Greenspan as Chairman of the Federal Reserve on February 1. Today, he presented his first economic report to Congress. It focused on the possibility of raising interest rates, along with commentary of the state of the housing market.

What happened to the economy at the end of 2005? What can be done to turn it around in 2006?

The economy in the final quarter of last year hit a rough patch, growing by an anemic rate of just 1.1 percent, the slowest in three years. This was largely chalked up to lingering fallout from Gulf Coast hurricanes, along with the toll of high energy prices that contributed to belt tightening by consumers and businesses. Most private economists are expecting good growth in the current January-to-March quarter.

High energy prices, a strengthening labor market where unemployment dipped to a 4 1/2-year low, and a solidly growing economy could fan inflation pressures — forces that the Fed will need to keep a close eye on, Bernanke said.

Bernanke, whose first day on the job was Feb. 1, said he agreed with Fed policy-makers’ assessment at their Jan. 31 meeting that interest rates may need to move higher. “The Fed judged that some further firming of monetary policy may be necessary, an assessment with which I concur,” he said.

Before Bernanke became Fed chief, policy-makers had differed on how much higher interest rates would need to go - but still signaled that the nearly two-year rate-raising campaign would probably be drawing to a close this year.

Decisions on the future course of interest rates will depend more heavily on what upcoming reports say about economic activity and inflation, Bernanke said. His first meeting as Fed chairman to decide this issuewill be March 27-28.

The fight against inflation

Bernanke, however, made clear that fighting inflation is a crucial Fed mission. “Stable prices promote long-term economic growth by allowing households and firms to make economic decisions,” he said. A stable price climate also nurtures employment growth, he said.

While energy prices raise one risk for the economy - and increase the popularity of green mortgages - another is posed by the future direction of the housing market, Bernanke said.

Although higher energy prices down the road could feed inflation fears, a cooling housing market raises the prospects of crimping consumer spending, which has been an important ingredient to the country’s economic health. How these uncertainties play out will be closely watched by the Fed, Bernanke said.

Still, at this point, Bernanke suggested he was hopeful the highflying housing market would make a soft landing by gradually losing altitude.

Dealing with an inverted yield curve

Bernanke also commented on a situation seen recently in U.S. markets, where long-term investments fetched lower interest rates for a while than short-term ones. He said this is “not signaling a slowdown” in the economy. The phenomenon, known as an “inverted yield curve,” has in the past often preceded a recession.

Typically, longer-term home loans carry higher interest rates than shorter-term home loans in order to compensate for investors tying up their money over a longer time frame. If this curve remains the status quo, you may wish to refinance your Florida home loan.