Keeping interest rates low is key to US recovery, warns Bernanke
Published 25/02/2010 | 05:00
Ben Bernanke, the chairman of the US Federal Reserve, warned Congress yesterday that interest rates would need to stay low to keep US economic recovery on track as official figures showed that sales of new American homes in January fell to a record low.
The dollar weakened against leading currencies, while the Dow Jones industrial average was catapulted from a 20-point rise to an increase of more than 100 points to 10,386.48 as investors digested the data and Mr Bernanke's forecasts.
Last week, the Federal Reserve raised the interest rate on emergency loans leading to fears that it was about to tighten up on fiscal policy, ending stimulus measures.
But Mr Bernanke said yesterday that subdued inflation and a high rate of unemployment warranted a low interest rate for "an extended period".
Mr Bernanke said that members of the Federal Open Market Committee -- which decides interest rates -- were expecting modest economic recovery this year but the 10pc rate of unemployment would decline only slowly to between 6.5 and 7.5pc by the end of 2012 -- "still well above their estimate of the long-run sustainable rate of about 5pc".
The Fed chairman described America's economic recovery as "nascent", and long-term recovery will depend on the private sector's demand for goods and services.
Mr Bernanke outlined some recent negative signs such as new housing starts, which "have recently been roughly flat and commercial construction is declining sharply, reflecting poor fundamentals and continued difficulty in obtaining financing".
The Commerce Department said that sales of newly built US single-family homes unexpectedly fell by 11.2pc to 309,000 in the 12 months to January -- the lowest since records began in 1963.
It was the third straight month that new home sales fell; analysts had expected an increase to 360,000 from December's previously reported figure of 342,000.
"The market is relieved the Fed will keep rates low for an extended period of time," said Cary Leahey, economist at Decision Economics in New York.
"The market had been afraid that the Fed might be close to hiking policy rates," she said.
Sectors that were worst-hit by Tuesday's sell-off rebounded to lead the way up, including financials and technology.
"People are still nervous about financials, and the Greek and European solution," said Colin McLean, managing director at Scottish Value Management in Edinburgh.
Investors had taken a wait-and-see approach this week before Mr Bernanke started his semi-annual testimony on monetary policy and the economy before the US House Financial Services Committee.