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Despite “Signs of Improvement” Bernanke Holds Near-Zero Rate Pledge

Speaking before the House Budget Committee in Washington today, Federal Reserve Chairman Ben Bernanke said that the U.S. economy appeared to be gaining in strength.

“Fortunately, over the past few months, indicators of spending, production, and job-market activity have shown some signs of improvement,” Bernanke testified. “The outlook remains uncertain, however, and close monitoring of economic developments will remain necessary.”

Despite the more positive tone, Bernanke reaffirmed a continuance of the Fed’s near-zero interest rate policy [1]. Last month, the Fed extended its pledge to hold the line on interest rates for an additional year, stating that rates would likely remain at the record low cap of 0.25 percent until late 2014.

To offset fears that low lending rates could lead to inflation, Bernanke told the Committee that the Federal Open Market Committee (FOMC) still considered 2 percent growth to be the ideal target. Given the current conditions, the FOMC expects inflation to remain “subdued” [2].

U.S. Consumer Confidence Falls Sharply in January

Bernanke’s testimony comes less than a week after the release of the January Consumer Confidence Index. The January result was a sharp decline in confidence, falling to 61.1 percent from 64.8 percent after two consecutive months of significant gains. The downturn in the index suggests consumers are increasingly worried that rising costs will take a greater bite out of household budgets.

There is hope that confidence will rise should the employment outlook continue to improve. For the final quarter of 2011, unemployment fell by half a percent to 8.5 percent and momentum appears to be gathering steam with claims for unemployment benefits falling more than expected for the week ending January 21st.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Scott Boyd

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