In his testimony yesterday, a downbeat Ben Bernanke highlighted the weaknesses of the economy and confirmed that interest rates will remain low for an extended period of time. Hold on just a second… Didn’t we just see a huge leap in employment and a considerable pickup in consumer spending? Is Big Ben really talking about the US?!
To the dollar bulls’ disappointment yesterday, the Fed Chairman was indeed referring to the US economy when he said that the moderate recovery could still be weighed down by high unemployment and low inflation. In fact, he even hinted that the central bank is open to further quantitative easing!
Perhaps the Fed head is just being overly cautious. In a time like this, it’s better to be safe than sorry, right? Aside from not wanting to withdraw their stimulus programs too soon, something else bothered Big Ben.
It turns out that Bernanke has been keeping an eye on the US-China currency talks as well. Bernanke took a stab at China, saying that they have been under valuing the Yuan in order to gain an unfair advantage in trade. As I’ve pointed out in a recent post, US officials have been walking a thin line regarding this issue, as they want to avoid damaging its relationship with China, both for economic and political reasons.
The question is: will US lawmakers heed Big Ben’s advice? After all, Bernanke has been credited with “saving the US economy” and was Time Magazine’s Person of the Year. So he must know a thing or two about what’s good for the economy, right?
What better way to support Bernanke’s claims than by looking at the broadest measure of China’s economic performance, its GDP report. Earlier today, China revealed that its economy grew by a whopping 11.9% during the first quarter of 2010. If you were to look at past figures, you’d see that this marked the fourth consecutive increase. I think there’s no doubt in anyone’s mind that the underlying trend is indeed up!
How about inflation? Well, China’s annualized consumer price index stood at 2.4% in March. Although this was lower than forecast, the last time China’s inflation rate hit this high was all the way back in November 2008, right when the world was just beginning to feel the effects of the global financial crisis.
The People’s Bank of China (PBOC) recently raised the bank reserve requirements rates in an effort to curb their ginormous growth, fearing that inflation may continue to rise. A flexible exchange rate would give China more capacity to keep inflation in check in order to prevent the economy from overheating. It would allow the PBOC to hike rates more freely, giving them more control over monetary policy.
Having a stronger Yuan would also promote domestic consumption in China. It would make imported products relatively cheaper, which would help the global re-balancing idea that has been floating around.
Let’s keep in mind though that this process wouldn’t only benefit China but the global economy as a whole. In the long run, it looks like having a floating currency will be a win-win situation for all parties concerned, especially the US.