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Ben Bernanke, Federal Reserve chairman, said the US central bank would remain vigilant over inflation, as he declared in a historic first press conference that a strong dollar was in the best interests of the US and the global economy.

Mr Bernanke’s comments came after the Federal Open Market Committee, which sets interest rates, confirmed that the US will complete its $600bn ‘QE2’ programme of asset purchases in June as planned and revised its economic outlook to reflect slower growth, higher inflation, and lower joblessness in 2011.

On inflation, Mr Bernanke said the current increase driven by higher petrol prices was likely to be temporary but that “there was no substitute for action and we would have to respond” in the event of a spike in inflation expectations.

He also sought to reassure that the Fed was not deliberately keeping the value of the dollar low.

“The Fed believes that a strong and stable dollar is in America’s best interests and in the interests of the global economy,” he said.

US stocks rose to a new post-crisis high, while the dollar was close to a three-year low as he spoke. By mid-afternoon in New York, the S&P 500 was up 0.3 per cent at 1,351.23, its highest level since June of 2008.

The dollar index was down 0.4 per cent, its lowest level since August 2008.

Mr Bernanke’s remarks came after Fed officials made significant revisions to their economic forecasts for 2011. US gross domestic product is now expected to grow at a pace of 3.1-3.3 per cent this year, compared with the earlier projection of 3.4-3.9 per cent. Headline inflation will be up 2.1-2.8 per cent in 2011, compared with the much lower earlier estimate of 1.3 to 1.7 per cent.

Excluding food and energy prices, inflation will be up 1.3-1.6 per cent compared with the 1-1.3 per cent predicted earlier this year by Fed officials. The unemployment rate will be lower than expected, at 8.4-8.7 per cent this year compared to 8.8 to 9 per cent in the earlier estimates.

The Fed statement did not make any major changes compared with the March meeting, signalling that the central bank is keen to head off any expectation that it will move to tighten policy soon.

The Fed continued to say that rates are likely to remain “exceptionally low” for an “extended period” and that it will continue to reinvest any repayments it receives from its portfolio of assets. The vote was unanimous.

The Fed faces a policy dilemma because the economy is showing renewed signs of weakness even as inflation picks up a little. Many analysts now expect that data due for release on Thursday will show first-quarter growth of less than 2 per cent.

At the same time, the overall consumer price index rose by 2.7 per cent over the previous year in March, and CPI excluding volatile food and energy prices rose by 1.2 per cent.

The FOMC said that “the economic recovery is proceeding at a moderate pace and overall conditions in the labour market are improving gradually”.

The Fed noted the rise in inflation but signalled that it is not yet concerned. ”Inflation has picked up in recent months, but longer term inflation expectations have remained stable and measures of underlying inflation are still subdued,” the statement said.

The FOMC said that it expects higher commodity prices to have a “transitory” effect on inflation but said “it will pay close attention to the evolution of inflation and inflationary expectations”.

Whether or not to respond to higher commodity prices is one of the biggest internal dividing lines within the Fed. “On the one hand, the hawks are asking if this will filter through to higher prices throughout the economy,” said Steve Blitz, senior economist at ITG Investment Research in New York, before the FOMC statement was released.

“On the other hand, the doves just say this is a tax on [profit] margins and a tax on consumption,” Mr Blitz said.

Vincent Reinhart, resident scholar at the American Enterprise Institute and former director of the Fed’s monetary affairs division, said that press conferences were an obvious Washington response to allegations of a lack of transparency and would let Mr Bernanke pre-empt the comments of regional Fed presidents, who are sometimes more hawkish than the consensus.

“But a couple of years from now, this is just going to be another Washington press conference where media-trained people try to influence the news,” he said


Posted 5:59 PM

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