Washington: February 28, 2008-  IR Summary - Chairman of the Federal Reserve, while giving own opinion on the state of the economy, said that the dollar sank to a historic low against other major currencies, introducing a possible third dimension to the economic problems and it is an urgent matter to be tackled immediately.
 He gave a clear signal on Wednesday to boost the economy with cheaper money even though inflation is picking up speedily.

The Fed chairman acknowledged that the central bank faced increasingly contradictory pressures of slowing growth and rising consumer prices. But his bottom line was that, for now, the top priority would be fighting a recession rather than fighting inflation. 

Having already cut short-term interest rates by almost half since September, Mr. Bernanke painted a grim picture of consumers reluctant to spend, businesses reluctant to invest and banks reluctant to lend. On top of it all, housing prices keep falling.

“The economic situation has become distinctly less favorable” since last summer, he told the House Financial Services Committee. In words that investors immediately recognized as a hint of lower rates, he vowed to “act in a timely manner” and “provide adequate insurance against downside risks.”

The Fed’s decision to err on the side of faster growth poses risks. Ever since the wrenching experience with stagflation in the late 1970s, the rule of thumb in monetary policy has been that reviving up a slow economy is far easier than slowing inflation once it becomes entrenched.

The hope is that lower interest rates will encourage consumers and businesses to spend more, while the risk is that the spending will aggravate inflation.

But the success or failure of the Fed’s strategy could depend on something outside Mr. Bernanke’s immediate control: foreign confidence in the American dollar and foreign willingness to keep financing the United States’ huge external debt.

The dollar has plunged 24 percent against a basket of six major currencies in the last four years, and on Wednesday it slipped to its lowest level yet since the United States let the dollar float freely in 1973.

A weak dollar can be both good and bad for the United States economy. It tends to bolster American exports by making them cheaper in foreign markets, but it also pushes up inflation by raising the cost of foreign imports. And while the United States pays for foreign oil in dollars, many analysts contend that part of the recent run-up in oil prices was tied to the steadily declining value of the dollar.
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