Speaking to the US Congress, the Federal Reserve Chairman, Ben Bernanke, said that the Reserve was carefully monitoring risks to the economy and is ready to take action if circumstances call for it. Analysts are hanging on his every word for signs of further stimulus measures which could affect the value of the Greenback. Comments made last week by Janet Yellen, vice chairman of the Federal Reserve which highlighted the weaknesses of the US economy, notably the weak job market and the continuing woes of the housing sector, were interpreted as signalling imminent further central bank support, but the boss’s comments appear to shift this onto the back burner.
The Reserve is clearly keeping one eye firmly fixed on the on-going sovereign debt crisis in Europe. Whilst moves at the weekend which secured a loan for the Spanish banking sector were warmly welcomed in all quarters, the initial stock market gains have largely been reversed in the face of higher yields on Spanish and Italian bonds and the Euro has slipped back on continuing doubts that the move was enough. This notwithstanding, Mr Bernanke pointed out that "despite economic difficulties in Europe, the demand for US exports has held up well". Nevertheless, the situation in Europe did pose significant risks to the US economy.
Economic indications continue to be somewhat contradictory with weakness in the US economy highlighted by disappointing job growth being contradicted by reports that overall economic activity had increased from April to the end of May.
Employment growth is a key concern of the Fed in considering the formulation of its monetary policy. Inflation is expected to stay at or below its 2% target and this gives the Fed a degree of flexibility to loosen its economic policy. It seems to be another case of “watch this space” for the time being, at least.