WASHINGTON — The chairman of the Federal Reserve Board, Ben Bernanke, has given Congress an upbeat view of the U.S. economy, predicting that unemployment was likely to remain low over the next two years even as inflation declined slightly.
Bernanke's comments Wednesday, which suggested that he is comfortable with interest rates at current levels, immediately lifted U.S. stock markets. His testimony soothed investors who had begun to worry that the central bank might be tempted to raise the cost of short-term borrowing later this year in fear that a stronger economy would push inflation higher.
The Dow Jones industrial average climbed more than 87 points, or 0.7 percent, to a record 12,741.86, and the broader S&P 500 rose 0.8 percent to hit 1,455.30, its highest point in more than six years.
Bernanke, whose one-year anniversary as Federal Reserve chairman was on Feb. 1, was careful not to change the Fed's current policy posture, which is to remain more concerned about higher inflation than slower growth. However, he appeared more optimistic that inflationary pressures were receding.
"Inflation pressures appear to have abated somewhat," Bernanke told the Senate Banking Committee, as he delivered the Fed's semiannual outlook on the economy and monetary policy. He was scheduled to provide similar testimony to the House Financial Services Committee on Thursday.
"A waning of the temporary factors that boosted inflation in recent years will probably help foster a continued edging down of core inflation," he continued.
The Fed's official forecast, an average of forecasts by Fed governors and the Fed's district banks, essentially portrays a "Goldilocks" economy that is neither too hot with inflation nor too cold with rising unemployment.
But Bernanke's statements revealed less about changes in the Fed's outlook than about changes in investor assumptions about the Fed.
A few months ago, investors were betting that the central bank would reduce rates even though Fed officials offered little hint in that direction. More recently, investors have jumped on evidence of solid economic growth to fret about possible rate increases.
In contrast to the changing moods on Wall Street, Bernanke expressed a broad satisfaction that the nation remains on track for a "soft landing," a modest slowdown in growth that would reduce upward pressure on prices without aggravating unemployment.
"The U.S. economy appears to be making a transition from the rapid rate of expansion experienced over the preceding several years to a more sustainable average pace of growth," he told lawmakers.
The "central tendency" among Fed forecasts is that the economy will expand by 2.5 to 3 percent this year; that unemployment will remain low at about 4.75 percent, which is near what many economists consider full employment; and for core inflation, excluding energy and food prices, to hover just above 2 percent.
The forecast calls for slightly slower growth in 2007 than the Fed had predicted last summer, but still in line with officials' estimates about the economy's long-run potential growth rate. The lower growth estimate reflected the sharp downturn in the housing market last year, and an expectation that housing will continue to drag down overall growth in 2007.
It was Bernanke's second congressional appearance since Democrats assumed majority control in both the House and Senate last month, and Democrats peppered him with questions about rising income inequality and the growing insecurity they said confront middle-income families.
https://www.nytimes.com/2007/02/15/business/worldbusiness/15iht-fed.4605930.html