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Tight Spot

By Reuters -  |  Posted 2008-07-15 Print this article Print

Fed Reserve chaiman Bernanke's comments offered little comfort to investors anxious about the economy and the health of the financial and banking sectors. U.S. stock indexes fell to their lows of the day after his statement, while the dollar weakened and U.S. Treasury debt prices rose as a safe-haven alternative to riskier assets.


Sluggish economic growth and stubbornly high inflation have put Bernanke in a tight spot as he tries to keep a lid on pricing pressures without inadvertently tipping the economy into a deep recession.

Pressure has grown -- both inside his policy-making committee and out -- for the Fed to consider raising interest rates after cutting them by 3.25 percentage points, to 2 percent, since mid-September.

Shortly before Bernanke testified, government reports underlined the dilemma policy-makers face -- sales at retail stores barely edged up in June but producer prices, which reflect wholesale inflation, jumped a larger-than-expected 1.8 percent.

News from the corporate arena was no more reassuring. General Motors Corp, struggling with declining vehicle sales, said it will cut 20 percent of its salaried work force, while Kimberly-Clark Corp cut its profit outlook because of high energy costs.

The usual policy prescription of hiking rates to curb the acceleration in prices, largely coming from costlier energy, might dampen an already sluggish pace of economic activity.

Bernanke said the Fed's efforts to date, including the rate cuts and a series of new lending facilities, had positive effects but that the economy still faced "numerous difficulties."

"Many financial markets and institutions remain under considerable stress, in part because the outlook for the economy, and thus for credit quality, remains uncertain," he said.

"Helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve," he added.

The Fed saw growth well below the economy's potential through the rest of this year, and then strengthening gradually over the next two years. At the same time, the central bank viewed overall inflation as high, and likely to increase temporarily as higher energy prices filter through.

(Additional reporting by Steven C. Johnson in New York and David Lawder in Washington; Editing by Dan Grebler)

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