Bernanke to savers: Keep waiting

Ben Bernanke picture

Savers will have to wait for the economic recovery to strengthen before the Federal Reserve will release its death grip on interest rates, Fed Chairman Ben Bernanke told reporters Wednesday.

In the first-ever regularly scheduled news conference by a Federal Reserve chief, Bernanke appeared poised and professorial as he put the best face on downgraded economic forecasts released two hours earlier by his rate-setting Federal Open Market Committee.

"The committee continues to anticipate that economic conditions … are likely to warrant exceptionally low levels for the federal fund rate for an extensive period," he said.

Translation: the Fed will continue to allow commercial banks to lend money to one another virtually interest-free, giving banks little incentive to move interest rates off their historical lows on consumer deposits like CDs and savings accounts.

Pressed by one reporter to define "extensive period," Bernanke suggested a minimum of two quarterly Fed meetings, then hedged, "We anticipate that we will tighten it (monetary policy) at the right time."

In other words, don't expect any interest rate relief until late 2010 or early 2011.

In its quarterly report, the FOMC said it would stay the course with its second round of quantitative easing, or QE2, and complete the purchase of $600 billion in Treasury bonds as planned by June 30. The QE2 program, which also puts downward pressure on interest rates, was designed to pump cash into the banking system to promote lending and, ultimately, economic growth.

But that's not happening, at least not at the pace the Fed initially thought.

Bernanke said that while economic recovery is proceeding at a moderate pace, recent events in the Middle East, Japan and developing countries have conspired to temporarily drive up oil and commodity prices. As a result, the Fed downgraded its 2011 economic growth forecast to 3.1-3.3%, down from 3.4-3.9%.

The Fed chief singled out gas prices, currently at a national average of $3.89 per gallon, as a "very adverse" but temporary development that represents a "double whammy" by creating inflation and slowing the economic recovery. The good news: he doesn't expect gas hikes to continue.

Responding to critics who blame recent consumer price spikes on the Fed's own easy-money policy, the committee acknowledged, "Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued."

Bernanke faces mounting pressure within his own ranks to bump interest rates to contain inflation, just as the central banks of Canada, China and Europe have done recently. Some analysts fear the Fed may be dozing at the switch in much the same way it failed to respond to subprime lending and the housing bubble.

But for now at least, Bernanke prefers to focus on kick-starting a "self-sustaining economic recovery" rather than fight the brush fires of inflation and consumer price volatility. He has long maintained that deflation, the decrease in the price of goods and services, poses a greater long-term threat to the economy than inflation.

"It's very hard to blame the American public for being impatient," the chairman admitted. "Conditions are very far from where we would like them to be. The combination of high unemployment, high gas prices and high foreclosure rates is a terrible combination and a lot of people are having a very tough time," Bernanke said.

But his outlook remains unremittingly positive.

"While the recovery process looks likely to continue to be a relatively moderate one compared to the depths of the recession, I do think that the pace will pick up over time and I am very confident that, in the long run, the U.S. will return to being the most productive, one of the fastest growing and dynamic economies in the world."

Until then, savers have little for which to cheer.

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