Markets look to Bernanke to extend period of ultra-low interest rates

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The Independent Online

Ben Bernanke could talk for two or more hours when he appears before a Congressional committee this morning, but there is only one word that financial markets want to hear from the Federal Reserve chairman's lips: "extended".

The word has become a totem of the central bank's policy of holding interest rates ultra-low while the economy struggles back to life, and each month since December 2008, the Fed's rate-setting committee has declared that economic sloth will warrant "exceptionally low levels of the federal funds rate for an extended period".

In public appearances over the past few months – and again in Washington on Monday night – Mr Bernanke has declared a growing confidence that the economy is gathering enough momentum to avoid a double-dip recession. However, he is likely today to highlight the continuing fragility of the financial markets, particularly in the eurozone, and the continuing high unemployment in the US as reasons to keep rates low for longer.

In remarks to the Woodrow Wilson Centre on Monday, the Fed chairman said he was cheered by the European Union's stabilisation plan for the eurozone, which makes nearly $1 trillion (€836bn) available to support nations that have trouble servicing deficits. It is "a lot of money", he said, and enough to protect Greece, Portugal and Spain from volatile credit markets for years to come. EU leaders are committed to ensuring the surival the euro, he said.

Traders in the US said Mr Bernanke's remarks were responsible for stopping the slide in equity markets, which marred the close of trading on Monday, and the Dow Jones Industrial Average was up by lunchtime, but trading was light ahead of the Fed chairman's more important testimony to the House of Representatives budget committee this morning.

John Lonski, the chief economist at Moody's Investors Service, said the testimony would be even more closely watched than usual, because of the skittishness of the financial markets and the eurozone debt crisis.

There were signs in US unemployment figures for May that the problems in the eurozone had increased uncertainty over the recovery and prompted private sector businesses to delay plans to re-hire workers. The overall unemployment rate in the US fell slightly to 9.7 per cent, but mainly because the labour force shrank.

Mr Bernanke repeated his view that unemployment will come down only slowly, but he was more broadly reassuring in the question and answer session at the Woodrow Wilson Centre. He cited improving consumer and business spending, which could sustain an economic recovery that markets have fretted has so far been built only on government stimulus. "There are some signs the private sector is picking up the baton," he said.

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