The Hindu Business Line : Will Bernanke testimony clear the air?

It's an endless debate. Is the US economy in the grip of a slowdown? Are inflation limits about to burst? How will the Fed react to the unpleasant alliance between less growth and rising inflation? Does Fed Chairman, Mr Ben Bernanke, have the answers? We will know on July 19 and 20 when Mr Bernanke appears before Congress for his semi-annual testimony on the state of the economy.

His seemingly contradictory remarks on the future course of interest rates have kept markets on the edge and led to unkind remarks from American politicians, one of whom wondered "if he was up to the job".

A far cry from Mr Bernanke's predecessor, Mr Alan Greenspan, whose awesome dominance of policy and markets has become legendary. It is not as if Mr Bernanke has not been communicative enough. If anything, he has erred on the side of excess.

The fact is that there is no clinching evidence of a slowing economy or inflation spinning out of control. The obvious approach is for the Fed to decide as it goes along, i.e., be data-driven, which is what it has been saying.

Market wants clarity

The market, however, wants clarity, which, despite Mr Bernanke's best intentions, does not seem to be possible at this point of time. There have been 17 continuous rate increases since June 2004, when the Fed funds rate was 1 per cent, which was a record low. Enough is enough, say a large body of economists, considering monetary policy has lagged effects on the economy and does not, unfortunately, have the precision of a laser beam, when it comes to tightening or loosening interest rates. More often, it is a case of too much or too little and too early or too late.

Wage-price circle

Job creation has been soft in the last couple of months but the latest figures still show rising wages. The fear is the dreaded vicious wage-price circle is back in circulation. Buoyant tax revenues, which enabled the Government to undershoot the expected budget deficit, also point to a strong economy.

Further, given the growth impulses in Europe, Japan and the rest of Asia, it is most unlikely that the US economy will fall out of bed.

The latest CPI data will be in Mr Bernanke's hands as he launches into his Congressional testimony.

It could show a picture of inflation creeping upward but nothing alarming. QIIGDP is due at the end of this month. If it does turn out to be better than expected, the `pause' case weakens. Hopefully, the uncertainty over policy will clear up sooner than later.

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