US economy to expand at moderate pace, inflation pressures easing

Reuters reports that the Fed chairman thinks that the outlook for the US remains positive.

In remarks to lawmakers, Federal Reserve Chairman Ben Bernanke on Wednesday expressed confidence in the health of the U.S. economy despite a housing slowdown.

"Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes," Bernanke said in remarks to the Senate Banking Committee...

He said there were some signs inflationary pressures were easing but added a few words of caution.

"It will be some time before we can be confident that underlying inflation is moderating as anticipated," Bernanke said. "The prices of oil and other commodities are notoriously difficult to predict, and they remain a key source of uncertainty to the inflation outlook."

Yesterday's economic data were somewhat mixed.

January retail sales were unexpectedly flat as motor vehicle, gasoline and electronics sales fell sharply in the post-holiday season after a December that was stronger than originally indicated, a Commerce Department report showed on Wednesday...

... [R]etail sales rose 0.3 percent in January after excluding the volatile automotive sector, which can skew the overall sales figures because automakers frequently change sales incentives...

Separately, applications for U.S. home mortgages rose last week, driven by an increase in loan refinancing, the Mortgage Bankers Association said on Wednesday. The trade group said its seasonally adjusted index of mortgage application activity rose 1.5 percent to 639.8 in the week ended February 9.

And ever mindful of the shifting winds of demand, U.S. businesses kept their inventories unchanged in December, which is the first time they did not add to their stocks since the summer of 2005, a Commerce Department report said.

US stock markets appear to be happy with Bernanke's testimony, according to another Reuters report.

U.S. stocks rallied on Wednesday, sending the Dow Jones industrial average to a record close, as investors were relieved by Federal Reserve Chairman Ben Bernanke's comments that inflation is poised to ease while the economy grows moderately...

The Dow Jones industrial average rose 87.01 points, or 0.69 percent, to end at a record 12,741.86, its 28th since the beginning of October.

The Standard & Poor's 500 index advanced 11.04 points, or 0.76 percent, to finish at 1,455.30. The Nasdaq Composite Index gained 28.50 points, or 1.16 percent, to close at 2,488.38...

Besides the Dow itself, the Dow Jones transportation average and Dow utilities average hit record closes, according to Dow Jones Indexes. The last time this happened was on March 17, 1998, it said.

The Dow Jones transportation average rose 2.1 percent to end at 5,117.27, while the DJ utilities average gained 0.4 percent to finish at 477.07.

Across the Atlantic, the Bank of England also released its outlook for UK inflation yesterday. Reuters reports:

Interest rates will probably need to rise one more time to keep inflation on track to hit its 2 percent target, the Bank of England signalled on Wednesday.

The central bank's quarterly Inflation Report showed CPI falling sharply to dip below 2 percent at the end of the year before picking up to the target at the two-year horizon...

Risks to the Bank's inflation forecasts were weighted to the downside in the near-term but to the upside further out and policymakers remain worried that wage demands are picking up and firms are more confident about raising their prices.

However, data earlier on Wednesday showed average earnings rose by less than expected in the three months to December, which may ease policymakers' fears...

The central bank also said a recent period of labour market loosening may be coming to an end. Wednesday's data showed the number claiming jobless benefits fell in January by its biggest amount in nearly three years.

Meanwhile, China's inflation appears to have cooled. Bloomberg reports:

Consumer prices rose 2.2 percent from a year earlier after climbing 2.8 percent in December, the government said. M2, the broadest measure of money supply, rose 15.9 percent, after gaining 16.9 percent in the previous month, according to a statement posted on the Web site of the People's Bank of China...

While consumer prices are likely to pick up "steadily" this year, potential asset bubbles will be a bigger concern for policy makers, said Qian Wang, an economist at JPMorgan Chase & Co. in Hong Kong.

China's M1 money supply, a measure made up mainly of cash and demand deposits, rose 20.2 percent in January, the biggest jump since June 2003. M1 growth has outpaced M2 since December because of an increase in deposits intended for speedy investment in the stock market, according to Wang.