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Pace Of Decline Seems To Have Slowed, Fed Chief Says

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http://www.nytimes.com/2009/07/22/business...tml?_r=1&hp

The pace of economic decline appears to have slowed, but the labor market remains weak and, in response, the Federal Reserve is likely to maintain interest rates at “exceptionally low levels for extended periods,†Ben S. Bernanke, the Fed’s chairman, told lawmakers on Tuesday.

Testifying before the House Committee on Financial Services, Mr. Bernanke said in his prepared comments that despite positive signs of an improvement in the economy, “the job loss rate remains high and the unemployment rate continues its steep rise.†The weak job market, coupled with falling home prices and tight credit, he said, are putting downward pressure on households, undermining “the recent stabilization in household spending.â€

Turning to inflation, Mr. Bernanke said that it was not currently a risk justifying an increase in interest rates to curb it. All of his colleagues on the Fed, he said, “expect that inflation will be somewhat lower this year than in recent years, and most expect it to remain subdued over the next two years.â€

At the height of the credit crunch in the final months of 2008, the Central Bank extended $1.5 billion in short-term loans to financial institutions, flooding the financial system with liquidity in a bid to restart lending.

As signs emerge in recent weeks that the economy was stabilizing and credit was easing, however, the concern is that if the Fed fails to absorb the surfeit of money from the economy in time, there could be a spike in inflation.

In his testimony, Mr. Bernanke said sought to assure legislators that the Fed would be able to prevent a flare up in inflation when the recovery begins to take hold. But, he said, any such steps would be far in the future.

The Fed board “is confident that it has the necessary tools to withdraw policy accommodation, when such action becomes appropriate, in a smooth and timely manner,†the agency said in its outlook statement.

“To some extent,†Mr. Bernanke said, “our policy measures will unwind automatically as the economy recovers and financial strains ease, because most of our extraordinary liquidity facilities are priced at a premium over normal interest rate spreads.â€

For example, he said, credit extended to banks and other financial institutions has fallen to less than $600 billion from about $1.5 trillion as the economy has improved.

Perhaps more important, he said, is the Fed’s ability, approved by lawmakers, to pay interest on the balances held at the bank by depository institutions. Increasing the rates of those reserves will probably also raise market rates, he said.

The Fed could also “drain liquidity from the system by conducting reverse repurchase agreements, in which we sell securities from our portfolio with an agreement to buy them back at a later date.â€

“We are confident that we have the tools to raise interest rates when that becomes necessary to achieve our objectives of maximum employment and price stability,†Mr. Bernanke said.

Genius he says the fed has the tools to raise interest rates. ;):rolleyes::rolleyes::blink: This is the level of intelligence in the worlds most powerful central banker. Jesus christ.

I read it more as we are still going to hit the brick wall, but the velocity will still write off the car.

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