08/08/08 - While President Bush and Treasury Secretary Paulson tries to gain consumer confidence in the market place, Fed Chairman Ben Bernanke talked down the economy at the congressional testimony on July 16th. 

 

Caught between risky cross currents of plodding growth and rising inflation, Fed policymakers are facing "significant challenges" as they try to find a way to right the economy, Bernanke told the Senate Banking Committee.

 

The Fed can't afford to lower rates again to shore things up because it will aggravate inflation. On the other hand, boosting rates to fend off higher prices would deal a setback to the fragile economy and the already crippled housing market.

Over the rest of this year, the economy will grow "appreciably below its trend rate" mostly because of continued weakness in housing markets, high energy prices and tight credit conditions. At the same time, inflation has remained high and "seems likely to move temporarily higher in the near term," Bernanke warned lawmakers.

The Labor Department reported wholesale prices, driven by skyrocketing gas and food costs, rose 9.2 percent in the 12 months ending June — the fastest in a quarter-century.

"The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining housing prices, a softening labor market and rising prices of oil, food and other commodities," Bernanke said.

Following his grim forecast, oil prices plummeted, bringing the two-day selloff to $10.58 a barrel, on reports indicating that demand for oil and gas may slacken in the future.  Since the testimony, the oil slide continued from over $145 per barrel to below $119 per barrel as of August 6th.

One Monday, the August 4th, a rumor spread in the Wall Street that some large hedge fund unwound its heavy commodity position which further put pressure on oil market.

The FED cannot afford to let the speculators bubble up the global commodities prices that would eventually cause the worldwide inflation.  His policy resembles the legendary former FED chairman Paul Volker who successfully brought down the 70's hyper inflation resulted from oil shortage by implementing the policy of contraction.

Bernanke's determination to bring inflation under control may lead to further slow down in the economy in months to come.  Any premature optimism in the economic outlook and the real estate market should be refrained in my opinion.

 

Thomas Pak
GyungJe.com
econ.la