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US economy is not on course for a sharp decline: Bernanke
3/22/2006
 

          NEW YORK, Mar 21 (AFP): New Federal Reserve chief Ben Bernanke said Monday the US economy is not on course for a sharp decline despite a strange pattern of behaviour on the bond market that foxed his illustrious predecessor.
In a speech to the Economic Club of New York, Bernanke shed little light on the direction of US interest rates as he prepares to chair his first meeting of the Fed next week.
But his speech, devoted to the bond market's so-called yield curve, did not suggest any major shift in policy by the US central bank.
"Although macroeconomic forecasting is fraught with hazards, I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come, for several reasons," he said in his prepared text.
Although the Fed under Bernanke's predecessor Alan Greenspan has raised US rates 14 times in a row, yields on longer-dated bonds have barely risen or have indeed fallen.
Greenspan famously described the odd trading pattern as a "conundrum", noting that ordinarily, long-term bond yields should rise in step with the shorter-run rates that are set by the Fed.
Bernanke advanced several theories to explain the conundrum, including fears by investors that US economic growth could be in peril, thus requiring the Fed to intervene by pushing borrowing costs lower.
He noted concerns expressed by some observers, including Boston Fed president Cathy Minehan earlier Monday, that the US property market could turn down after a decade-long boom or that high energy prices could curb growth.
"If these drags on the growth of spending do materialise, then a lower real interest rate will be needed to sustain aggregate demand and keep the economy near full employment," he said.
But the Fed chief played down those fears. Before past recessions, he noted, both short- and long-term interest rates have been relatively high, unlike now.

 

 
 

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