BARCELONA — Federal Reserve Board chairman Ben Bernanke yesterday embellished his views of the economy but did not signal a clear direction for monetary policy.

In remarks prepared for the International Monetary Conference here, Bernanke indicated he is content with the 2.0% setting of the federal funds rate, saying “for now monetary policy is well positioned.”

However, he said the Fed will be carefully monitoring how economic and financial conditions evolve and will “act as needed” to meet both growth and inflation aspects of its dual mandate.

He cited both downside risks to economic growth and upside risks to inflation, although he said so far core inflation has not been greatly affected by spiking commodity prices.

Bernanke also made some fairly unusual comments on the depreciating dollar, saying the Fed and the U.S. Treasury will “carefully monitor” the behavior of the greenback because of its inflation indications.

His comments on the economic outlook were not markedly more upbeat than they have been in recent weeks.

Bernanke said “the functioning of financial markets has improved of late, but conditions remain strained and some key funding and securitization markets have shown only tentative signs of recovery.”

“Some borrowers, such as highly rated corporations, retain good access to credit, but credit conditions generally remain restrictive in areas related to residential or commercial real estate,” he continued. “Residential construction continues to contract, and the overhang of unsold new homes remains large, although it has declined some in absolute terms.”

Bernanke said “households continue to face significant headwinds, including falling house prices, a softer job market, tighter credit, and higher energy prices, and consumer sentiment has declined sharply since the fall.” He added that “businesses are also facing challenges, including rapidly escalating costs of raw materials and weaker domestic demand.”

He said domestic weakness has been partially offset by the strength of foreign demand for U.S. goods and services.

Referencing the Fed’s quarterly forecast, Bernanke said: “We may see somewhat better economic conditions during the second half of 2008, reflecting the effects of monetary and fiscal stimulus, reduced drag from residential construction, further progress in the repair of financial and credit markets, and still solid demand from abroad.”

— Market News International


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