US central bank sounds inflation warning

The World Today - Thursday, 29 March , 2007 12:34:00
Reporter: Peter Ryan

ELEANOR HALL: The world's most powerful central banker has sounded a new warning about inflation in the United States and sparked concerns about interest rates.

The chairman of the US Federal Reserve, Ben Bernanke, said that while he's worried about the high-risk end of the US mortgage sector and that it could contribute to an economic slowdown, he regarded inflation as the greater threat to the global economy.

Economists say Mr Bernanke's comments on inflation suggest a cut in interest rates is now off the agenda.

And that has sent some investors on Wall Street running for the door.

More from our Business Editor Peter Ryan.

PETER RYAN: For Ben Bernanke, today's world is hardly one of economic stability, with rising oil prices, growing tensions with Iran, and almost daily volatile data usually sets hearts racing on Wall Street.

It's not much comfort, but there is one constant for central bankers - the ever-present "i" word or inflation.

BEN BERNANKE: Although core inflation seems likely to moderate gradually over time, the risks to this forecast are to the upside.

In particular, upward pressure on inflation could materialise if final demand were to exceed the underlying productive capacity of the economy for sustained period.

PETER RYAN: Ben Bernanke was addressing a joint economic committee on Capitol Hill.

And he used the opportunity to reign in expectations stemming from last week's decision on interest rates that a rates cut was back on the agenda because of the softer language he was using on inflation.

But Mr Bernanke reinforced today's message on inflation with tougher words such as "risk" and "uncertainty".

And he added another touch of reality, confirming that the US economy, while not heading towards recession, is continuing to lose steam.

BEN BERNANKE: Economic growth in the United States has slowed in recent quarters, reflecting in part, the economy's transition from rapid rate of expansion experienced over the proceeding years to a more sustainable pace of growth.

PETER RYAN: Another factor, according to Ben Bernanke, is the continuing downturn in the US housing market, which has sent shockwaves through the overall economy, from building companies to the makers of building materials.

But at the moment, he says it's steady as she goes for the traditional mortgage market.

BEN BERNANKE: Mortgages to prime borrowers and fixed rate mortgages to all classes of borrowers continues to perform well with low rates of delinquency.

PETER RYAN: But it's the crisis in the sub prime mortgage sector - risky loans to borrowers with little or no credit history - that appears to be keeping Ben Bernanke awake at night.

BEN BERNANKE: To the downside, the correction in the housing market could turn out to be more severe than we currently expect.

Perhaps exacerbated by problems in the sub prime sector. Moreover we could see yet greater spill over from the weakness in housing to employment and consumer spending than has occurred thus far.

PETER RYAN: The mixed messages of a slowing economy, higher inflation, and little chance of a cut in interest rates despite the housing correction encouraged some investors to take their profits and run.

Wall Street closed in a gloomy mood, with the Dow Jones Industrial Average and the tech heavy Nasdaq both down 0.8 of 1 per cent.

And data earlier in the day showing that orders for durable goods rose less than expected last month, only underpinned the pessimism.

KEN MAYLAND: There really is a slow down going on in the industrial side of the economy and this is probably not the end, we're not at the end of it yet.

PETER RYAN: Ken Mayland is an economist and president of Clearview Economics in New York. He's also predicting tough times ahead for the US economy.

KEN MAYLAND: That's a bad signal, that's a sign that more production adjustments are necessary, so I think the next three, four months are going to be pretty tough slugging for the manufacturing side of the economy.

PETER RYAN: But it's the spiralling price of oil that continues to overshadow the global economic picture.

It's now up for the seventh day in a row - well above $US 64 a barrel - and the escalating concerns about Iran, particularly from Britain and the United States, could see the oil price remain volatile in the months to come.

ELEANOR HALL: Business Editor Peter Ryan.