The head of the US central bank, Ben Bernanke, Wednesday said he foresees continuing strong growth and moderating inflation for the U.S. and global economies. Financial markets rallied strongly on his remarks, assuming that interest rates may no longer be rising.
It was Wall Street's strongest rally in weeks and the market's first advance since the beginning of hostilities in Lebanon and Israel last week. The Dow Jones industrial average gained over 200 points or nearly two percent to the 11,000 level.
Mr. Bernanke gave the strongest suggestion yet that the Federal Reserve may not need to raise interest rates further to combat the inflationary effect of higher oil prices. The 52 year-old economist, not yet six months into the job of Federal Reserve chairman, told a congressional committee that the U.S. economy is holding up well and that only a slight moderating of economic growth is underway.
"In particular the central tendency of those forecasts (from regional federal reserve banks) is for real gdp (gross domestic product) to increase by from 3 3/4 to 3 1/2 percent in 2006, and from three to 3 1/4 percent in 2007," he said.
Mr. Bernanke told senators that the 17 consecutive rises in interest rates over the past two years have not harmed the economy and may have contained inflationary pressure. The Federal Reserve will consider further adjustments in short-term rates on August 8.
Mr. Bernanke's forecast indicates that the doubling of gasoline prices over the past two years has not demonstrably slowed the pace of economic activity. Last week oil prices reached a record high of over $78 a barrel. They have subsequently fallen back to the $73 level. Analysts caution however that any disruption to oil facilities in the Persian Gulf could trigger an immediate sharp upward spike in prices.
The buoyancy of the world economy in the face of sharply higher oil and other commodity prices has surprised economists. The International Monetary Fund has said that world output is growing at an impressive nearly five percent annual pace. China reported this week that its economy is now expanding at a stunning 11 percent annual rate, its best performance in a decade. Mr. Bernanke and the Federal Reserve see the US inflation rate as holding below four percent in 2006 and 2007.