While the economy has been resilient in recent months, policy makers at the Federal Reserve do not see that such performance is likely to be sustained in the near term, as inflationary pressure increases, Federal Reserve Chairman Ben Bernanke said Thursday.
In testimony before lawmakers in Washington at the Joint Economic Committee, Bernanke said volatility and strains have persisted in financial markets since the Federal Open Market Committee voted on October 31 to cut a benchmark lending rate.
Bernanke noted several factors contributing to the instability. Among them are investor concerns about credit market developments, implications of the housing market downturn for economic growth, and rising crude oil prices, which have renewed upward pressure on inflation and may impose further restraint on economic activity. The falling dollar has also contributed to upward inflation pressures, he said.
He said that the FOMC expects that economic activity will slow noticeably in the fourth quarter and remain sluggish for the first part of 2008, but would strengthen as the effects of tighter credit and the housing correction begin to diminish.
Bernanke implied that the door could be open to further rate cuts if needed. The FOMC had asserted on October 31 that the recent federal funds rate cuts to 4.5 percent had roughly balanced the upside risks to inflation and the downside risks to growth.
The FOMC will continue to carefully assess the implications for the outlook of the incoming economic data and financial market developments and will act as needed to foster price stability and sustainable economic growth, he said.