Fed Chief Optimistic of Soft Landing

By Nell Henderson
Washington Post Staff Writer
Wednesday, November 29, 2006

The nation's central bank is growing more confident that the U.S. economy will slow gradually in a way that should cause inflation to decline without tipping the nation into a recession, Federal Reserve Chairman Ben S. Bernanke said yesterday.

"Over the next year or so, the economy appears likely to expand at a moderate rate, close to or modestly below the economy's long-run sustainable pace," Bernanke told the National Italian American Foundation in New York, in his most extensive remarks on the economy since July. Inflation "is expected to slow gradually from its recent level."

The primary risk to the Fed's forecast is the possibility that a tight labor market could push inflation higher than expected, which could prompt the Fed to raise interest rates, Bernanke said, according to a text of his prepared remarks.

Inflation "has been somewhat better behaved of late" but also remains "uncomfortably high," he said.

Bernanke delivered his speech just a few hours after two economic reports fanned concerns that the economy might be weakening further. The reports showed that new orders for long-lasting durable goods, including automobiles and appliances, fell sharply in October and that consumer confidence dipped in November.

The economy expanded at a sluggish 1.6 percent annual rate in the three months ended in September, down from a 2.6 percent pace in the three months ended in June.

Bernanke did not directly address yesterday's economic statistics nor did he discuss a recent fall in the value of the dollar that could have wide-ranging effects on U.S. companies and workers.

He said the economic slowdown "primarily reflects a cooling of the housing market." He struck an upbeat tone, however, saying, "to date, there is little evidence that the weakness in housing markets is spilling over more broadly to consumer spending" or the labor market.

Bernanke's comments reinforced financial-market expectations that Fed policymakers will leave their benchmark overnight interest rate unchanged at 5.25 percent when they meet in two weeks and hold it steady in the months ahead.

"The Fed is firmly on hold," said Stuart G. Hoffman, chief economist for PNC Financial Services Group. He said Bernanke's remarks show that the Fed thinks "the economy is not snowballing down a slope toward a hard landing or a recession. There are plenty of cushions along the way."

The slower pace of home construction "is likely to be a drag on economic growth into next year," Bernanke said. But he also pointed to signs that home sales may be stabilizing. Sales of new homes rose in August and September, and sales of previously owned homes rose in October. Mortgage applications have been increasing since July.

Bernanke said most of the economy outside of the housing market "appears to be expanding at a solid rate." Many factories are churning out more goods for export. U.S. businesses are spending more on non-residential construction, equipment and software.

And consumer spending has continued to rise, buoyed by low unemployment, rising wages and falling fuel prices.

Rather than sound concerned about a slowdown, Bernanke suggested it was just what the Fed expected when it raised interest rates steadily over two years through June to keep the economy from overheating and driving inflation higher.

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