US INTEREST rates would remain at exceptionally low levels for an “extended period” in spite of the “nascent” economic recovery, Federal Reserve chairman Ben Bernanke told Congress yesterday.

Mr Bernanke painted a relatively gloomy picture of the economy, which is still struggling in the wake of the crisis, with high unemployment and a weak housing market. This meant inflationary pressures – the main driver of tighter monetary policy – were likely to remain “subdued”, he added.

“The Federal Open Market Committee continues to anticipate that economic conditions – including low rates of resource utilisation, subdued inflation trends, and stable inflation expectations – are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” Mr Bernanke told the house financial services committee.

Mr Bernanke’s insistence that rate rises are still months away will damp fears that last week’s increase in the discount rate – at which commercial banks can borrow emergency cash from the central bank – from 0.5 per cent to 0.75 per cent is a precursor to a swifter tightening of monetary policy.

Fed officials have indicated that it was simply a move to unwind emergency liquidity measures put in place during the crisis as a result of improving conditions in the financial markets and not a tightening move. Economists at Goldman Sachs said it was “crystal clear” the Fed did not anticipate raising rates in the near future.

Nevertheless, the Fed this month began to lay out its vision for the sequence of measures it expects to take to shrink the money supply once the economic recovery is sufficiently strong.

Although the economy grew at an annualised rate of 5.7 per cent in the fourth quarter of 2009, economists are expecting the pace of growth to slow over the course of the year. The Fed is expecting growth of 3 per cent to 3.5 per cent this year. “A sustained recovery will depend on continued growth in private sector final demand for goods and services,” said Mr Bernanke. As Mr Bernanke began speaking, data showed sales of new homes in the US unexpectedly fell in January, dropping to the lowest level on record.

As well as discussing the economic outlook and monetary policy, Mr Bernanke also had to address the fallout from the financial crisis. – Copyright The Financial Times Limited 2010