Fed warns of double-dip recession risks despite signs of recovery

Click to follow

The risk of a double-dip recession in the world's largest economy remains, and interest rates will stay low for an extended period of time, the chairman of the US Federal Reserve told lawmakers in Congress yesterday.

Ben Bernanke's doveish testimony came despite new economic data showing America's recovery gathering momentum, with retail sales figures that eclipsed economists' brightest hopes. "It looks like we're on a path to moderate recovery and that the risk of a double-dip, while certainly not negligible, is certainly less than it was a few months ago," the Fed chairman said. "That being said, there are any number of possible things that could derail it."

In his twice-yearly appearance before the Joint Economic Committee of Congress, Mr Bernanke notably refused to backtrack on the Fed's commitment to keeping interest rates low "for an extended period" – language it has repeated after each rate-setting meeting and which has become a touchstone for financial markets as they try to judge when the Fed will begin to tighten monetary policy.

He said demand in the economy was building but added that employers had not yet begun to hire workers in significant numbers, preferring to squeeze more hours and more productivity out of their existing staffs. Mr Bernanke added: "We have seen remarkable productivity gains in the last year or so in the US economy. We don't anticipate productivity growth will continue at that rate going forward but, if it does, that may reduce the number of workers firms need to bring back to meet demand. So there is a possibility – I wouldn't consider it the leading possibility – that unemployment will stay stubbornly high, around 10 per cent, and if that were to happen that would be one of the risks, because it would affect consumer confidence."

Retail sales figures for March were up 1.6 per cent – the biggest gain in four months – signalling that consumers are gaining confidence in the outlook for their finances, rather than losing it. Economists had been forecasting an annualised rate of 1.3 per cent.

Robust car sales accounted for much of the outsize gain, but there was also unexpected strength in clothing sales and building materials.

Paul Ashworth, a senior US economist at Capital Economics, said: "The big question is whether this burst is sustainable. We still fear it won't be. High unemployment, weak incomes, low confidence, tight credit conditions and the need for debt deleveraging all point to restrained consumption growth over the next couple of years."

Inflation is also still subdued, allowing the Fed to keep rates low to stoke the recovery. The consumer price index for March, out yesterday, showed inflation at just under 0.1 per cent.