MercoPress. South Atlantic News Agency

Bernanke forecasts “significant” recovery of US economy

Federal Reserve Chairman Ben S. Bernanke forecasted Thursday the United States economy will show a “significant” recovery this quarter and called on China to make its currency more flexible.

"It appears that the first quarter will see a significant rebound from the fourth quarter, and likely productivity will come back with it'' Bernanke told the Senate Banking Committee on the second day of testimony to Congress.

US retail sales last month increased the most since May 2004 and the jobless rate fell to the lowest in more than four years. This Thursday the US Commerce Department revealed that construction of new houses last January rose to its highest for more than 30 years. The building activity index rose 14.5% in January, pushing construction to an annual rate of 2.27 million units, which is the fastest rate March 1973. The 14.5% rise in building activity in January followed a 6.9% fall in December.

In his first day of testimony Bernanke said that he concurred with the view expressed at the Fed January 31 rate decision that further increases may be necessary. The Fed hiked interest rates 14 times since June 2004, bringing it to the current 4.5%.

Turning to China, Bernanke joined Treasury Secretary John Snow in calling for China to let the yuan trade more freely. Demand for consumer products has led to a flood of imports from China, widening the trade deficit to a record and spurring complaints China is keeping the yuan artificially low.

"China ought to move toward a more flexible exchange rate" Bernanke said in response to a question by Charles Schumer, a Democrat from New York who is sponsoring a bill that would impose tariffs on China if the yuan isn't strengthened at a faster pace.

"They see some benefits in what they view as stability'' Bernanke replied when asked why the yuan hasn't moved much since it was revalued 2.1% last July. "They see an advantage in exports of keeping their exchange rate where it is".

The yuan has appreciated less than 1% since the revaluation and a simultaneous shift to managing it against a basket of currencies, including the euro and yen. But the biggest daily fluctuation has been less than 0.1%.

Exports helped China's economy double in size in the past decade, but exports also swelled the U.S. trade deficit with China to a record 201 billion US dollars spurring calls for sanctions by legislators who claim Beijing is keeping the yuan artificially weak.

But the Fed chairman didn't offer any support to proposals to erect trade barriers: "It's not a good idea to break down some of the gains we've made in terms of free and open trade in the world economy".

However Bernanke said the US can not continue indefinitely to finance its current account deficit which stands at a record 6% of GDP, insisting that "we should bring that down over time".

Precisely the massive holdings of US dollars overseas, (China has 800 billion US dollars) has stirred certain unrest in US Congress members but Bernanke said he sees no sign of a major shift in foreign central banks plans to hold US dollar assets.

"Even a moderate shift would not have a big impact on US asset values. China's massive holdings of US dollar assets are not enough to put the US economy at risk", he underlined.

Bernanke's remarks to Congress come two weeks after taking the helm of the world's most powerful central bank from Alan Greenspan. The transition from Greenspan occurred with the US economy in its fifth year of expansion.