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Bernanke says inflation, growth, market issues 'challenging'

Thu, Jan 17 2008, 16:47 GMT
http://www.afxnews.com

WASHINGTON (Thomson Financial) - The last few months have been "challenging" for the Federal Reserve, Chairman Ben Bernanke said today, with conflicting pressures on economic growth and inflation.

"We have two objectives and one instrument and we need to balance those risks appropriately," he said responding to a question about the possibility of stagflation in a House Budget Committee Hearing.

The Fed's legal "dual mandate" is to promote stable growth and stable prices. While Bernanke clearly signalled the Fed's principal worry at the moment is the slowing economy, "in no way are we going to ignore" inflation issues, he said.

The Fed is looking at forecasts in markets for oil, foods and other commodities that indicate a moderating of inflation pressures, he said, but coupled that with a warning that "futures markets have consistently underestimated" the price rises over recent months.

"Our anticipation is that inflation will moderate over the next year or two to a level we would view as consistent with price stability," Bernanke said.

There is an interaction between the Fed's policies and goals, he explained, in that "our ability to address a growth shortfall is critically dependent on our maintaining our credibility in fighting inflation."

In other words, a central bank that lacks anti-inflation credibility has less manoeuvring room to cut interest rates in order to boost growth.

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UPDATE: Dollar Declines Against Rivals On Bernanke Testimony

Thu, Jan 17 2008, 17:03 GMT
http://www.djnewswires.com/eu

UPDATE: Dollar Declines Against Rivals On Bernanke Testimony


(Update with analyst comments, prices and background.)




By Riva Froymovich

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--The dollar has returned to early Thursday morning levels after a sharp decline against its major rivals on prepared testimony from Federal Reserve Chairman Ben Bernanke to Congress.

The U.S. currency rebounded in spurts throughout Bernanke's subsequent question-and-answer session, and returned to pre-testimony levels, which were still weaker on the day.

"The market is pricing in more rate cuts from the Fed," said Stephen Gallagher, chief U.S. economist at Societe Generale in New York.

A cut to the Fed's benchmark lending rate typically decreases the attractiveness of the dollar.

"We also had very weak housing news this morning. That also weighs on the dollar," said Gallagher.

The euro jumped to an intraday high of $1.4716 and Y157.85 immediately after the release of Bernanke's speech. The dollar also dropped below Y107 after climbing early in the morning toward its intraday high.

The greenback had already been underfoot versus the euro earlier in the day on a disappointing, although expected, financial earnings report from Merrill Lynch & Co. (MER), which had a massive fourth-quarter net loss.

Late Thursday morning in New York, the euro was at $1.4682, up slightly from $1.4657 late Wednesday. The dollar was at Y107.02, down from Y107.54. The euro was at Y157.12, down from Y157.60, according to EBS. The U.K. pound was at $1.9745, up from $1.9628; and the dollar was quoted at CHF1.0995, little changed from CHF1.0996 late Wednesday.

Bernanke repeated the pledge he made last week to enact "substantive" rate cuts if needed to counter the threat to the economy posed by fragile financial markets and weakening employment.

Those remarks were widely interpreted to mean that the Fed would reduce its short-term interest-rate target, probably by a half-percentage point from its current 4.25%, at the central bank's next meeting on Jan. 29-30. It has already lowered the federal-funds rate 100 basis points since September.

"There is inherently nothing new" in Bernanke's comments, which is why the dollar returned to previous levels over the course of his testimony, said Geoffrey Yu, foreign exchange strategist at UBS in Zurich.

Bernanke's remarks that the Fed isn't concerned with a major moral hazard reaffirm that the Fed, said Yu, "will move rates as much as they believe is necessary and is allowed for the market without precipitating a new housing bubble."

The Fed chairman also endorsed a "quickly" implemented fiscal stimulus package, saying it would complement the Fed's efforts to provide monetary-policy insurance against an economic downturn.

"He's being very cautious about this stimulus package, but at the same time being very forthright about the condition of the U.S. economy," Yu said.

It is unclear what kind of response the dollar might have to a stimulus package, because the specifics of such a package are still being determined and it would have a lagging effect on the economy, analysts said.

"The issue is what U.S. consumers are going to do with the money," said Yu. "Is the American consumer lowering its propensity to consume?"

U.S. President George W. Bush also concluded Thursday that the U.S. economy needs a short-term boost, the White House said. Previously, the White House had said Bush was considering stimulus options, but hadn't made a decision about whether a package was needed.

During the question-and-answer session before the House Budget Committee, Bernanke also noted that growth in Europe and Asia won't be as deeply affected as in the U.S. That signals ongoing dollar weakness, considering the Fed's expected rate cut.

At the same time, European Central Bank President Jean-Claude Trichet made comments in Frankfurt.

"Trichet has been trying to limit the damage caused by (ECB governing council member Yves Mersch)," said Yu.

On Wednesday, Mersch, a usually hawkish official, acknowledged that euro-zone growth might have to be downgraded from 2.0% this year. Markets saw this as evidence that the ECB may not be in rate-hiking mode after all.

The U.K. pound also pushed north to new intraday highs during Bernanke's testimony, following a pattern that began before the speech, to top out at $1.9789.

UBS initiated a long sterling trade recommendation Thursday.

"Sterling has been tremendously oversold on consecutive record lows against the euro," said Yu. "A lot of bad news has already been priced into the pound."

Earlier Thursday, the Commerce Department said home construction plunged 14.2% in December, tumbling to its lowest point in 16 years, after falling 7.9% in November. The big decline surprised Wall Street. The median forecast of economists surveyed by Dow Jones Newswires was a 5.0% drop.

Additionally, Canada's dollar just pushed toward a fresh four-month low Thursday as prices for crude oil, a big Canadian export, move lower on a weak Philadelphia Fed manufacturing report. Recently, the dollar hit an intraday high of C$1.0307.

-By Riva Froymovich, Dow Jones Newswires; 201 938-5063; [email protected]

(Brian Blackstone in Washington contributed to this report.)

(END) Dow Jones Newswires

January 17, 2008 12:03 ET (17:03 GMT)


Copyright 2008 Dow Jones & Company, Inc.

 

[surf4sports]

Forex - Dollar weakens after further bad news on US economy, Bernanke comments

Thu, Jan 17 2008, 17:10 GMT
http://www.afxnews.com

LONDON (Thomson Financial) - The dollar was weaker after a string of weak data, including a woeful Philly Fed survey, and dovish comments from Federal Reserve chairman Ben Bernanke.

In a testimony before US lawmakers, Bernanke said "downside risks to growth have become more pronounced", that "additional policy easing may well be necessary", and that rate cuts may have to be "substantive". He also expressed support from additional fiscal stimulus for the government.

Bernanke's cautious view on growth was supported by a massive and unexpected slump in the Philadelphia Fed manufacturing activity index, which tumbled to -20.9 in January from -1.6 in December, way below forecasts for -1.3.

All this gives further confirmation that the Federal Reserve will deliver a 50 basis point interest rate cut later this month, with further large cuts to come.

"In short, the Fed will cut rates by a bigger 50 basis points at its meeting that concludes on Jan 30 and will cut rates again after that if the economic data continues to head south," said Paul Ashworth, economist at Capital Economics.

Earlier in the day, US housing starts data were also very weak, dropping 14.2 pct in December, though these were partially offset by strong jobless claims data.

The euro's gains against the dollar were limited, however, partly because earlier comments by European Central Bank official Yves Mersch were interpreted as suggesting euro zone rates may be set to fall, and partly because investors feel the dollar already has a substantial amount of bad news priced in.

"Euro/dollar is looking a little stuck in the 1.45-1.50 range," said Steve Barrow at Bear Stearns.

He said the euro seemed to respond more to the Mersch comments than to the raft of bad news out of the US - the Bernanke comments, poor data and further news of huge write-offs from a major US financial institution, this time from Merrill Lynch.

Mersch stressed that the downside risks to growth have increased and said the ECB could "look through" temporary high levels of inflation, though he later backtracked, suggesting an interest rate cut was not being considered.

Meanwhile, the pound gained, reaching a nine-day high against the euro and the dollar after earlier relatively hawkish comments from Bank of England Monetary Policy Committee member John Gieve.

Gieve warned of a "sharp rise" in inflation in the UK over the coming months which is complicating the job of rate-setters at a time when the credit crunch has diminished growth prospects.

"These are likely to raise our inflation rate well above target in the coming months at a time when short-term inflation expectations remain uncomfortably high," he said.

Gieve was one of only two MPC members to vote for a rate cut in November. The comments, however, are unlikely to alter expectations that the Bank of England will cut interest rates next month.

"Gieve's comments seemed to help sterling," Bear Stearn's Barrow said, adding that news that Scottish and Newcastle are in talks with Carlsberg A/S and Heineken NV on a possible takeover for the UK brewer has also helped the pound gain against the euro.

London 1643 GMT London 0840 GMT

US dollar

yen 107.01 down from 107.73

sfr 1.0992 down from 1.1082

Euro

usd 1.4684 up from 1.4590

yen 157.13 down from 157.31

sfr 1.6142 down from 1.6171

stg 0.7435 up from 0.7430

Sterling

usd 1.9744 up from 1.9638

yen 211.23 down from 211.74

sfr 2.1703 down from 2.1760

Australian dollar

usd 0.8820 up from 0.8819

stg 0.4466 down from 0.4488

yen 94.41 down from 95.09

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The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.

 

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France's Lagarde says mkts now in recovery phase after tensions of last year

Thu, Jan 17 2008, 17:12 GMT
http://www.afxnews.com

PARIS (Thomson Financial) - French Finance Minister Christine Lagarde said markets are now in a recovery phase after the tensions of last year.

She said the European Central Bank helped to ease tensions in credit markets by its injections of liquidity at the end of 2007.

The economic fundamentals of European countries are good but the market turmoil does pose a risk to the growth outlook, Lagarde told a news conference following a meeting with her counterparts from Germany, Italy and the UK.

German Finance Minister Peer Steinbrueck said EU countries are seeing "very good economic figures" but the financial market turmoil may continue for the next few months.

EU economic and monetary affairs commissioner Joaquin Almunia said the European economy is still expected to grow around its potential rate in 2008, but the financial turmoil and the US economic slowdown may weigh on EU growth.

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The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.

 

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Slovenian PM: Govt To Cut Spending Following Growth Hike -AFP

Thu, Jan 17 2008, 17:20 GMT
http://www.djnewswires.com/eu

Slovenian PM: Govt To Cut Spending Following Growth Hike -AFP

LJUBLJANA, Slovenia (AFP)--Slovenia's government plans to revise its 2008 budget and cut down on spending to counter the effects of rising inflation, Prime Minister Janez Jansa said here Thursday.

"The government will have to reduce some spending in order to soften the effects of inflation," Jansa told journalists, adding his cabinet was preparing a budget revision proposal to parliament to "reduce some spending, mostly on account of the Defense Ministry's investments."

Current European Union president Slovenia, the first former Yugoslav state to join the E.U. and the North Atlantic Treaty Organization in 2004, registered 5.7% inflation over 12 months in 2007, compared to the 3.5% initially forecast by the government.

Growth meanwhile was expected to reach 5.8% in 2007.

This has prompted major unions in the public and private sectors to demand a salary increase to follow the price hikes over the last 12 months. They have threatened to stage a general strike in the next few weeks if their demands aren't met.

Jansa said his center-right government had already proposed a law to reduce taxes for people with lower incomes as well as an increase in social aid for families that will reflect on the budget.

"Since we do not intend to further increase the weight of taxes on citizens, we have decided to take more measures in order to reduce spendings," Jansa said.

Defense Minister Karl Erjavec, also leader of the junior coalition Pensionist Party, backed the budget re-balance Thursday, saying: "If we are in a position in which the social state is under threat, with the lowest pensions at only EUR345, then we have to find the money.

"We will find it in the defense budget," he said, adding his ministry was prepared to cut spending by EUR32 million.

Erjavec noted however "no vital project will be endangered, we will just delay some issues (investments)."

He said the cuts shouldn't affect Slovenia's commitments to NATO: Ljubljana agreed, when it joined NATO in 2004 to increase defence spending to 2.0% of GDP by 2007.

But Jansa admitted: "We did not meet that objective in 2007 and we won't meet it this year either."

Slovenia's 2008 budget, adopted in 2007 and revised last November, sees revenues at EUR8.63 billion and spending at EUR8.86 billion.

(END) Dow Jones Newswires

January 17, 2008 12:20 ET (17:20 GMT)


Copyright 2008 Dow Jones & Company, Inc.

 

[surf4sports]

Brazil's Central Bank Buys Dollars At BRL1.7844

Thu, Jan 17 2008, 17:23 GMT
http://www.djnewswires.com/eu

Brazil's Central Bank Buys Dollars At BRL1.7844

RIO DE JANEIRO (Dow Jones)--Brazil's Central Bank bought U.S. dollars at a snap auction Thursday for BRL1.7844 per dollar, the bank said.

The bank did not reveal the volume of dollars purchased.

The bank said it is purchasing dollars to build up foreign reserves.

-By Jeff Fick, Dow Jones Newswires; 55-21-3288-5011; [email protected]

(END) Dow Jones Newswires

January 17, 2008 12:23 ET (17:23 GMT)


Copyright 2008 Dow Jones & Company, Inc.

 

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AT A GLANCE: Bernanke Backs Temporary Fiscal Stimulus

Thu, Jan 17 2008, 17:31 GMT
http://www.djnewswires.com/eu

AT A GLANCE: Bernanke Backs Temporary Fiscal Stimulus

THE EVENT:

Federal Reserve Chairman Ben Bernanke, testifying before the House Budget Committee on Thursday, endorsed a "quickly" implemented fiscal stimulus package, saying it would complement the Fed's efforts to provide monetary-policy insurance against an economic downturn. Bernanke repeated the pledge he made last week to enact "substantive" rate cuts if needed to counter the threat to the economy posed by fragile financial markets and weakening employment. He also said he sees the economy growing, but at a "relatively slow" pace, in 2008.

He added that subprime losses so far have totaled about $100 billion and could climb much higher if delinquencies and foreclosures rise.

WHAT HE SAID:

The Fed is "prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability," he said.

Housing, he said, will probably subtract more than one percentage point from gross domestic product growth in the fourth quarter and "may continue to be a drag on growth for a good part of this year as well."

Thursday's remarks included an extensive discussion of fiscal stimulus, a topic Bernanke has avoided publicly until now. "I agree that fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone."

Fiscal stimulus is OK, he said, as long as it is "implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so." He said a fiscal stimulus package between $50 billion and $100 billion would be "reasonable."

He also said the U.S. should avoid recession, though he expects a period of subpar growth in the first part of 2008.

"We're not forecasting recession," he said, but the U.S. should grow at a "relatively slow" pace. The economy still has "inherent strengths," he said.

Bernanke was asked by lawmakers about the potential economic effect of a fiscal stimulus package totaling around $100 billion. He replied that if a good chunk of that was channeled into spending quickly, the economic effects could be "significant" in the second half of 2008 and into 2009, and not "window dressing."

He also said it was "would be counterproductive to increase taxes" to pay for the stimulus package.

MARKET REACTION:

Treasurys gained on the news that Bernanke said greater rate cuts were needed. The 10-year note jumped 9/32 to 104 21/32 to yield 3.68%. The two-year note increased 3/32 to 101 16/32 to yield 2.45%.

Stocks slid after Bernanke's testimony - the Standard & Poor's 500 index recently fell 15 points, or 1.1%, to 1358, a new 52-week intraday low; the Dow Jones Industrial Average shed 101 points to 12378, and is about 450 points from its 52-week nadir. For the year to date, the Dow is off 6.8%.

The dollar has returned to early Thursday morning levels after a sharp decline against its major rivals. Late Thursday morning in New York, the euro was at $1.4682, up slightly from $1.4657 late Wednesday. The dollar was at Y107.02, down from Y107.54. The euro was at Y157.12, down from Y157.60, according to EBS. The U.K. pound was at $1.9745, up from $1.9628; and the dollar was quoted at CHF1.0995, little changed from CHF1.0996 late Wednesday.

Fed funds futures contracts - measuring potential outcomes for next two FOMC meetings - were flat to slightly higher after Bernanke's testimony. The February contract was recently unchanged at 96.35, pricing in about a 40% chance for a 75 BP ease to 3.5% at or before the Jan. 29-30 session. The April contract was recently up 1.5 basis points at 96.685, fully priced for 3.5% at the March 18 Federal Open Market Committee meeting, with about a 74% chance for further ease to 3.25%. That's up from about a 68% chance for 3.25% as priced in at Wednesday's settlement.

WHAT THEY SAID:

"The dollar's declining for a lot of different pieces of news," said Stephen Gallagher, chief U.S. economist at Societe Generale in New York. "The market is pricing in more rate cuts from the Fed. We also had very weak housing news this morning. That also weighs on the dollar."

Bernanke's comments that a fiscal stimulus package "could be helpful in principle" but that it must be temporary and enacted quickly is "a far cry...from (former Fed Chairman Alan) Greenspan's absurd speech in 2001 when he effectively urged huge tax cuts to prevent a massive surplus arising," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "On the economy, no change in the themes from Mr. Bernanke's speech last week, acknowledging increased downside risks and promising 'substantive additional action as needed.' We expect 50 basis points on the 30th, with more to come."

"There is inherently nothing new" in Bernanke's comments, which is why the dollar returned to previous levels over the course of his testimony, said Geoffrey Yu, foreign exchange strategist at UBS in Zurich. Bernanke's remarks that the Fed isn't concerned with a major moral hazard reaffirm that the Fed "will move rates as much as they believe is necessary and is allowed for the market without precipitating a new housing bubble," he said. "He's being very cautious about this stimulus package, but at the same time being very forthright about the condition of the U.S. economy."

(END) Dow Jones Newswires

January 17, 2008 12:31 ET (17:31 GMT)


Copyright 2008 Dow Jones & Company, Inc.

 

[surf4sports]

Spain Deputy Fin Min: Solid Demand Behind Spanish Housing Market

Thu, Jan 17 2008, 17:32 GMT
http://www.djnewswires.com/eu

Spain Deputy Fin Min: Solid Demand Behind Spanish Housing Market

LONDON -(Dow Jones)- Solid demand underpins the Spanish housing market, the country's deputy finance minister and secretary of state for economic affairs, David Vegara, said Thursday.

Speaking at an investor presentation in London, Vegara said there is "solid demand" behind the housing market, adding that he expects a "moderate rather than abrupt" slowdown in the market.

He said the recent decline in the one-year Euribor is positive for the Spanish housing market.

The construction sector has been one of the main engines of Spanish economic growth over the past 10 years, but Vegara said while it was important, it wasn't the only factor.

"Industry and (the) service sector have replaced construction as the main engines of the economy," he said.

Spain has been the euro zone's fastest growing large economy for more than a decade, but it is expected to slow sharply over 2008 as property prices fall, credit conditions tighten and weakening consumer confidence and rising unemployment take their toll. A December survey of 17 international research institutions by Consensus Economics forecast Spanish GDP would grow just 2.6% in 2008, down from 3.8% in the year to the end of September.

"Rising prices and slower economic growth don't bode well for the Spanish economy this year," said Kim Forkes, an economist at Moody's Economy.com. "Tightened credit conditions, both for households and firms, have curbed spending. Meanwhile, increased prices for oil and food are fanning inflation."

But the Spanish government has much more bullish growth forecasts. It expects the economy to expand at a rate of 3.8% in 2007, 3.1% in 2008 and 3.0% in 2009.


Spanish Treasury Web site: http://www.tesoro.es




-By Emma Charlton and Nick Winning, Dow Jones Newswires; 44-20-7842-9307; [email protected]

(Jonathan House in Madrid contributed to this item.)

(END) Dow Jones Newswires

January 17, 2008 12:32 ET (17:32 GMT)


Copyright 2008 Dow Jones & Company, Inc.

 

[surf4sports]

Dallas Fed's Fisher warns inflation threat limits Fed easing to boost growth

Thu, Jan 17 2008, 17:45 GMT
http://www.afxnews.com

WASHINGTON (Thomson Financial) - The Federal Reserve can go only a limited way in cutting rates to boost the US economy before it risks creating the basis of a future inflationary spiral, Dallas Federal Reserve Bank Chairman Richard Fisher warned today.

"One has to bear in mind," he said, "that the seeds of inflation, once planted, can lie fallow for some time, then suddenly burst through the economic topsoil like kudzu, requiring a near-toxic dose of countermeasures to overcome."

The Fed is under pressure now to cut rates and protect the economy from recession, but has to resist giving in to the pressure to the extent of sowing those seeds. The Dallas Fed president has a vote on the rate-setting Federal Open Market Committee this year.

Taking a phrase from Fed Chairman Ben Bernanke, Fisher said "I stand ready to to take substantive action to support growth and provide insurance against downside risk," but then added a qualification, "as long as inflation expectations remain contained."

And when it comes to measuring those expectations, Fisher thinks the Treasury's Inflation Protected Securities, consumer surveys may be underestimating the chances of a sudden shift toward expecting higher inflation.

Bernanke has also expressed concern about containing inflation expectations, but Fisher went further than Bernanke has, in judging the size of the inflation threat.

The global economy's growing demand for oil and other raw commodities "represents an inflationary headwind that is unlikely to soon abate," Fisher predicted.

As a result of that, he believes "we will have to err on the side of running tighter policy than would otherwise be justified if we wish to limit upward inflation pressures."

[email protected]

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COPYRIGHT

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The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.

 

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France's Lagarde says mkts in recovery phase after tensions of last year UPDATE

Thu, Jan 17 2008, 17:48 GMT
http://www.afxnews.com

(updating with Lagarde comments on French growth, Darling comments on UK economy)

PARIS (Thomson Financial) - French Finance Minister Christine Lagarde said markets are now in a recovery phase after the tensions of last year.

She said the European Central Bank helped to ease tensions in credit markets by its injections of liquidity at the end of 2007.

The economic fundamentals of European countries are good but the market turmoil does pose a risk to the growth outlook, Lagarde told a news conference following a meeting with her counterparts from Germany, Italy and the UK.

She told journalists after the news conference that she expects the French economy to grow around 2 pct in 2008, as in 2007.

German Finance Minister Peer Steinbrueck said EU countries are seeing "very good economic figures" but the financial market turmoil may continue for the next few months.

EU economic and monetary affairs commissioner Joaquin Almunia said the European economy is still expected to grow around its potential rate in 2008, but the financial turmoil and the US economic slowdown may weigh on EU growth.

But he said the EU is likely to avoid a pronounced slowdown.

Lagarde also acknowledged that the difficulties of the US economy poses risks to the European growth outlook.

UK Chancellor of the Exchequer Alistair Darling declined to comment directly on the pound's recent decline but he said the UK's economic fundamentals are strong. He said he remains confident that the UK economy will get through its current difficulties resulting from the US subprime mortgage crisis.

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sw/ajb/sw/ajb

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The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.