Carping against the new Federal Reserve chairman Ben Bernanke subsided yesterday after tame US inflation data appeared to support this month's decision to bring a halt to two years of interest rate rises.
Consumer prices grew at a slower rate than expected in July, cheering stock market investors who had worried that the Fed may have to resume rate rises later this year. But the figures also sent the dollar lower against many major currencies, because it provided further evidence that the US economy is slowing down after several years of fast-paced growth.
Core inflation - which is the Fed's preferred measure of inflation because it strips out volatile food and energy costs - was limited to 0.2 per cent in July, after four months of rising at 0.3 per cent. Wall Street had expected another 0.3 per cent.
Including food and energy, consumer prices were up 0.4 per cent, in line with forecasts.
The Fed had accompanied its interest rate decision - one of the most finely balanced for years - with a prediction that inflation pressures seem likely to moderate over time.
The Fed voted to keep rates at 5.25 per cent after 17 consecutive increases. It said that economic growth was slowing because of a cooling housing market, high energy prices and the cumulative effects of its long series of rate rises since June 2004.
But hawks have worried that consumer price inflation remains stubbornly high and have been demanding that Mr Bernanke prove his inflation-fighting credentials, and one member of the interest rate setting committee voted against a pause in rate rises at the meeting early this month.
"If the Fed had to vote today, they'd probably keep the rate unchanged," Lynn Reaser, an economist at Bank of America, told Bloomberg after the inflation figures. "This report would be considered a big victory for Bernanke."
Other data out yesterday also vindicated the Bernanke thesis of a moderating economy. Housebuilders began the construction of 2.5 per cent fewer homes in July than they did a year earlier. And a report on industrial production from the Fed said output in July rose a smaller-than-anticipated 0.4 per cent, only half of June's 0.8 per cent climb.
Stock markets have swung about in the first six months of the Bernanke era, as traders struggled to interpret his stance on inflation and as the Fed insisted that future interest rate moves will be "data dependent".
Yesterday, they continued a two-day rally that had been sparked by similarly weak producer price inflation data. The Dow closed 96.86 points higher at 11,327.12, as investors bet that the Fed may not need to raise rates again. The markets are already expecting interest rate reductions next year.
Bond prices rose and the dollar fell against the euro and the yen. Alan Ruskin, at RBS Greenwich Capital in Connecticut, said the CPI data would "definitely provide another fillip for 'the Fed is done' camp," and said it was difficult to find anything positive for the greenback in the numbers.