Bernanke: Financial Markets Under Heavy Stress - Tight Spot
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TIGHT SPOT
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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