Don't yuanna listen!

Thursday, May 26, 2005

Ben "Printing Press" Bernanke today told the Senate Banking Committee that while long-term US interest rates might rise if China stops buying US government bonds, any increase would not be big enough to hit the economy hard, Reuters reported. "I don't think it's really the case that foreign central bank holdings of US securities are the primary reason why our interest rates are as low as they are," he said, playing down concerns over the potential for a spike in interest rates should China move to a freer currency regime, according to the report.
The economy not getting hit hard does not mean he rules out a hit, it has to be underlined. For an extensive sum-up of the Sino-American revaluation debate click here. Bernanke, nominee for the top job of president Bush's Council of Economic Advisers (CEA) added another paragraph to the more than two years old debate about a Yuan revaluation. "I do believe they are now ready to go to a more flexible exchange rate regime and I would urge them to do that," Bernanke said. Shortly after his remarks he was rebuffed, this time by Yu Jianlong, director general of the economic information department for the China Council for the Promotion of International Trade. "The time has not come for us to appreciate the value of the Chinese currency," the official was quoted in this Reuters dispatch.
Higher US interest rates are on their way
Independently from the possibility that China could stop gobbling up ever more US debt papers, Fed Atlanta president Jack Guynn sees higher interest rates on the horizon. In a speech to home builders he said, "I have strongly supported the Fed's actions to gradually remove our policy accommodation. I believe our strategy to act before the appearance of widespread price increases is sound and necessary to keep inflation and inflation expectations firmly in check. The gradual rate hikes at this stage of the economic recovery also reduce the chances that the Fed will later need to take a more painful path of steep hikes."
He went on to say, "we are approaching an increasingly uncertain time for monetary policy. The Fed's goal is to achieve what's often referred to as a neutral policy setting, where rates are at a level that promotes growth without the likelihood of a run-up in inflation. Of course, as economic fundamentals shift over time, our view of neutrality may change. Given my current outlook for the economy, my personal view is that we've not yet reached a neutral policy stance."
He added that the gowing federal deficits have become a long-term concern and that excessive deral spending would eventually add risks to the US economy. Referring to high levels of private debt, Guynn offered the hope that rising interest rates could slow the brisk pace of borrowing and lead to a higher savings rate as well.
UPDATE: Mark Thoma provides the link for a video of Bernanke's hearing on his nomination to the CEA.


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