Economic Growth May Be Lower Than Expected

[Aug 2, 2007.]

The head of the Federal Reserve Board is taking a conservative course when it comes to predictions about the economy—a move that's being applauded by some in the investment sector.

Federal Reserve Chair Ben Bernanke indicated recently that the economy appears to be fairing better. However, he appears to be pessimistic about economic growth in the near term.

In his mid-year economic report, Bernanke told members of Congress that the economy is poised to improve "at a moderate pace" over the next few months. He added that growth is likely to be slower than what the Fed had predicted during the winter. The reason? A worse-than-expected housing market appears to be to blame.

Next year, however, growth may rebound, according to Bernanke. The Fed chair also expects inflation to be lower, except when it comes to energy and food prices.

Meanwhile, observers predict that, in light of Bernanke's statements, interest rates may remain the same throughout the year 2007. The rate has remained at 5.25% for more than a year. Prior to that, the Federal Reserve Board had increased rates for two years in an effort to head off inflation which, unfortunately, remains a concern.

Energy and commodity prices remain a worry. Such rising prices could, in turn, affect the prices of a number of other goods and services. As a result, inflationary fears remain.

Bernanke stated that the Federal Reserve Board "has consistently stated that upside risks to inflation are its predominant" concern. Overall, consumer prices inched up just 0.2% in June. That's actually the lowest increase in 5 months. A decline in gasoline prices is credited with helping to keep consumer prices under control.

Still, gasoline prices have been on the rise in recent weeks, renewing inflation concerns. Consumer spending could also be adversely affected by the current housing crisis, which shows no signs of abating.

Julie Ann Amos
August 2nd 2007

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