New US Federal Reserve chief Ben Bernanke said last night that the US economy was not on course for a sharp decline despite a strange pattern of behaviour on the bond market.
In a speech to the Economic Club of New York, Bernanke shed little light on the direction of US interest rates as he prepared to chair his first meeting of the Fed next week.
But his speech, devoted to the bond market's so-called yield curve, did not suggest any major shift in policy by the US central bank. 'I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come,' he said.
Although the Fed under Bernanke's predecessor Alan Greenspan has raised US rates 14 times in a row, yields on longer-dated bonds have barely risen or have indeed fallen.
Greenspan famously described the odd trading pattern as a 'conundrum', noting that ordinarily, long-term bond yields should rise in step with the shorter-run rates that are set by the Fed.
Bernanke advanced several theories to explain the conundrum, including fears by investors that US economic growth could be at risk, thus requiring the Fed to intervene by pushing borrowing costs lower.
He noted concerns expressed by some observers, including Boston Fed president Cathy Minehan earlier yesterday, that the US property market could turn down after a decade-long boom or that high energy prices could curb growth.
But the Fed chief played down those fears, saying that by suggesting a lower risk of inflation in future, the flat yield curve could in fact signal confidence in the US economy's prospects.
During a question-and-answer session after his speech, Bernanke said the US current account deficit remained a 'concern' because its size posed a risk to interest rates and the dollar.
