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Bernanke Offers No Clues About Possible Rate Cut

CNBC.com
Tuesday, 11 Sep 2007 | 11:27 AM ET
Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington, Wednesday, Feb. 14, 2007, before the Senate Banking Committee hearing on monetary policy. (AP Photo/Dennis Cook)
Dennis Cook
Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington, Wednesday, Feb. 14, 2007, before the Senate Banking Committee hearing on monetary policy. (AP Photo/Dennis Cook)

Federal Reserve Chairman Ben Bernanke said the U.S. and other countries must work together to correct the global imbalance of trade and investment, offering no clue about whether the central bank will cut rates at its Sept. 18 meeting.

So-called "global imbalances" occur when countries such as the U.S. run up bloated trade deficits, while other countries, such as China and oil-producing nations, produce big trade surpluses. The International Monetary Fund has been
leading efforts over the years to reduce lopsided trade and investment patterns.

As for prospects of fixing the problem, Bernanke said, "Signs of progress have
appeared but ... most countries have only just begun to undertake the policy
changes that will ultimately be needed." He spoke at a conference in Berlin.
Copies of his remarks were made available in Washington.

Scholary Speech

Bernanke's scholarly speech did not address the future course of interest rates
in the U.S. nor the state of the U.S. economy.

Bernanke Speech Analysis
Instant analysis on the Fed chief's remarks, with Joe Battipaglia, Stifel Nicolaus market strategist; Barry Ritholtz, Ritholtz Research & Analytics; CNBC's Steve Liesman & Dylan Ratigan

Economists increasingly believe the Fed at meeting next Tuesday will slice a key
interest rate, now at 5.25%, by at least one-quarter percentage point to
help protect the economy from the ill effects of a deepening housing slump and a
painful credit crunch.

Worldwide long-term interest rates, which had been low for a long period, have
gone up recently "in part because of the greater recent volatility in financial
markets and investors' demands for increased compensation for risk-taking,"
Bernanke observed.

Those once unusually low long-term rate in the United States and other countries
have puzzled policymakers. Former Fed Chairman Alan Greenspan--Bernanke's
predecessor--once called the behavior of these low long-term rates a
"conundrum." Bernanke once again said a number of factors probably influenced
these low rate, including the desire of many countries to save a lot.

Trade Deficit Shrinks

So far this year, the U.S. trade deficit is running at an annual rate of $711
billion, down from $758.5 billion in 2006. Last's year trade deficit marked the
fifth year in a row where the trade deficit hit an all-time high.

Economists believe the trade balance will finally shrink this year as U.S.
exporters benefit from strong economic growth in many countries overseas and a
weaker dollar against many currencies. That makes U.S. products cheaper on
foreign markets and imports more expensive for American consumers.

The United States larger current account deficit, which includes not only
monthly trade figures but also investment flows, would be helped if the country
boosts savings and continues to trim its federal budget deficit, Bernanke said.

China, meanwhile, has recognized the need to increase its domestic spending and
scale back its reliance on exports, Bernanke said. Those and other measures will
help global trade imbalances over time, he added.

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