Peru
Angry down south
Would-be populists everywhere
LAST year the economy grew by 9% and poverty fell by five percentage points. But many Peruvians feel their lot is not improving fast enough. That is especially so in the country’s southern Andes. On July 8th-9th trade unions staged a general strike, claiming the government had reneged on various promises. While having little impact in Lima, the strike was widely backed in southern towns, with protesters blocking roads and the railway to the Inca ruins at Machu Picchu. Earlier this month miners struck to demand a bigger share of bumper mining profits. In the same cause a group in the southern department of Moquegua last month took scores of police hostage and burned government offices.
But it is to Puno, a poor and remote region of 1.3m on the border with Bolivia, that those Peruvians who fear an impending populist shift look most closely. The head of its regional government, Hernán Fuentes, clashes regularly with Peru’s president, Alan García. He has attempted to legalise production of coca, the shrub from which cocaine is extracted. He is pushing for sweeping local autonomy. He is a fan of the socialist nationalism pursued by Venezuela’s Hugo Chávez and Bolivia’s Evo Morales, while abhorring Mr García’s economic liberalism. The president and Mr Fuentes accuse each other of failing to implement government measures to help Puno, such as laws to create a second university there and a free-trade zone. “We are like oil and water,” Mr Fuentes says. “We have different ideas about Peru’s political, economic and social future.”
Mr Fuentes was elected for a small party headed by Antauro Humala, a former army officer who staged an attempted coup against the democratic government in 2005, an incident in which five people were killed. Mr Humala’s elder brother, Ollanta, narrowly lost the presidential election to Mr García despite—or rather because of—having noisy backing (and probably money) from Mr Chávez.
It is Mr Fuentes’s ties with Mr Chávez, real or not, which cause alarm in Lima. He set up several Casas de ALBA, centres which promote friendship with Venezuela and send patients at its expense for free cataract operations there. Venezuela denies paying for these centres’ political activities, and Peru’s government has found no evidence of this. But Peru’s Congress is conducting its own investigation.
Mr Fuentes insists this will find nothing. Rather than from his antics, a populist threat in Peru at the next election in 2011 may once again come from Ollanta Humala. He is doing his best to appear moderate. But his proposal to increase the taxes on mining and oil companies commands widespread popular support.
Chinese outbound investment
Dealing with sinophobia
An oil deal highlights foreigners’ wariness towards Chinese companies
AFTER 11 months of often painful negotiations, China Oilfield Services, a subsidiary of China National Offshore Oil Corp (CNOOC), finally announced on July 7th that it had agreed to buy Awilco, a publicly listed Norwegian oil-services company, for $2.5 billion. The importance of the deal lies not in the underlying business logic (both companies own oil rigs), the possible synergies (Awilco has deep-water experience China lacks, whereas China Oilfield Services has access to cheap funds) or even the price, which is modest in the grand scheme of things. It lies, instead, in the fact that the deal got done at all.
Chinese firms are in an odd situation. Their increasing wealth means they can afford to make acquisitions. But they are increasingly regarded as unpalatable buyers. Since 2005, when CNOOC was blocked by the American government from acquiring Unocal, an American oil firm, many of China’s state-owned giants have been wary of bidding for Western firms. Instead, they have preferred to do deals in places like Africa, where asset sellers and the government work together (and often overlap), and high prices overcome objections, at least in the short term.
To deflect concern, Chinese government and business officials (who also often overlap) have also sought to team up with Western partners when bidding for foreign companies; a mirror image, in short, of the way deals are done in China. But the demise in March of Huawei’s effort to acquire 3Com, an American technology firm, in the company of Bain Capital, a private-equity group, because of American concerns about technology transfer has discredited this strategy and reduced the perceived value of Western partners. Many similarly structured deals are in the works, but others have been dropped.
Yet another approach has been to make minority investments, in finance in particular. ICBC, a giant state-owned bank, bought 20% of South Africa’s Standard Bank last year; Ping An Insurance has bought 4% of Fortis, and half its asset-management business. Various Chinese state investment funds have bought chunks of Blackstone, Morgan Stanley and Barclays. But these non-controlling stakes are messy, with little strategic value—and, when financial markets are falling, unprofitable.
Reservations about Chinese investment are particularly acute in Australia, which is packed with the raw materials Chinese industry craves. Sinosteel, a state-owned trading company based in Beijing, won permission in April to acquire Midwest, an Australian iron-ore company, but it may be a one-off; later applications have stalled. An estimated $40 billion of potential Chinese purchases are floating in and out of Australia’s Foreign Investment Review Board, waiting for approval.
The reviews are supposed to be transparent: applicants submit requests and get a decision within 30 days. In fact, it is less clear-cut than that. The applications are private and the decisions are public. If a buyer gets wind of a rejection, it can withdraw its request and resubmit it again and again with no disclosure. Insiders reckon that dozens of applications are caught in this loop, and that informal diplomatic signals have been sent to discourage any more—at least for the time being.
If one company epitomises the concern of Australian regulators, it is CNOOC itself. Its core business of domestic oil exploration is closed to foreign competition, and it is part of a government-controlled domestic oligopoly that may violate Western countries’ antitrust rules. Australia is also worried about CNOOC’s vertical integration, fearing that it might place an artificially low value on the resources it extracts from Australia and thus deprive the government of tax revenues.
No doubt aware of these concerns, CNOOC and its subsidiary chose the Norwegian deal carefully. Much time and effort was spent shepherding it past China’s regulators, and then ensuring it would not trigger howls in Oslo, where Awilco is listed, says Amy Lo, a lawyer at Clifford Chance who was part of the negotiations. It helped that Awilco was not a household name, so there were few headlines. Norway has not had any recent spats with China, and has plenty of oil of its own in the North Sea, so it was unlikely to kick up much of a fuss. But finding similar candidates will not be easy.
Brian Gu, head of the Greater China merger-advisory unit of JPMorgan, an investment bank, and an adviser to China Oilfield Services on the recent deal, says he has never been busier. In recent months he helped arrange acquisitions for WuXi PharmaTech and Mindray, both medical companies. It was surely no coincidence, however, that the targets were tiny and in highly competitive industries—so the deals failed to trouble regulators or xenophobes. For the time being, those may be the only sorts of deals that Chinese firms can do.
July 15 (Bloomberg) -- Gender and race will loom large when Barack Obama or John McCain has a chance to fill a U.S. Supreme Court vacancy.
With only one woman and no Hispanics on the court, the next president will feel pressure -- and perhaps a desire -- to diversify the nine-member court.
``Regardless of who is elected president, there will be strong sentiments in favor of appointing a woman or someone who would reflect other elements of diversity such as an Hispanic or African-American,'' said Theodore Olson, a former U.S. solicitor general who heads McCain's advisory committee on judicial appointments.
Six justices are 68 or older, so the next president might get multiple appointments. Republicans have the most to gain because the likeliest initial retirees -- John Paul Stevens, 88, Ruth Bader Ginsburg, 75, and David Souter, 68 -- are members of the progressive bloc in the divided court.
McCain has promised to nominate justices in the mold of President George W. Bush's appointees, Chief Justice John Roberts and Justice Samuel Alito, potentially shifting the outcome in cases on abortion, race and religion. Last month, a single vote would have changed 5-4 decisions barring capital punishment for child rape and expanding the rights of Guantanamo Bay inmates.
For Obama, the court's demographic realities may push four women -- appeals court judges Sonia Sotomayor, Kim McLane Wardlaw and Diane Wood and Harvard Law School Dean Elena Kagan -- to the top of his short list.
Wood and Kagan have the advantage of being known entities to Obama, 46, an Illinois Democrat. Both worked alongside him on the faculty at the University of Chicago Law School.
Smart Judge
Wood, 58, a judge on the 7th U.S. Circuit Court of Appeals in Chicago, is one of the brightest minds on the bench, according to appellate lawyer Tom Goldstein of Akin Gump in Washington.
``If you ask who is the most talented female, the near unanimous answer may be Diane Wood,'' said Goldstein, whose Scotusblog Web site tracks the court. ``She has a lot of juice.''
Still, Wood's age may work against her, as Democrats seek a nominee who can serve for several decades. Roberts was 50 and Alito 55 when nominated in 2005.
Kagan, 48, won plaudits for smoothing over some of the ideological tensions that plagued Harvard Law School before she became dean in 2003. Faculty member Charles Fried, who was President Ronald Reagan's top Supreme Court lawyer, has touted Kagan as high court material.
Kagan is ``widely respected on both sides of the aisle,'' said Rachel Brand, a former Bush Justice Department official who shepherded the Roberts and Alito nominations through the Senate.
New York Judge
Sotomayor and Wardlaw are both 54-year-old Hispanics appointed to their current posts by President Bill Clinton. Democrats suggested Sotomayor, a judge on the 2nd Circuit in New York, as a possible Bush nominee when Sandra Day O'Connor announced her retirement in 2005.
Wardlaw, a judge on the San Francisco-based 9th Circuit, might have been the frontrunner for the high court had Hillary Clinton captured the Democratic nomination and the presidency. Wardlaw and her husband are longtime political supporters of the Clintons.
Other Obama candidates include Merrick Garland, 55, a federal appellate judge in Washington, and Seth Waxman, 56, formerly the Clinton administration's top Supreme Court lawyer. Their chances might improve with a second or third vacancy, after Obama has added another woman to the court.
``A court for the United States of America that has only one woman on it is an absurdity, and I'm sure that Senator Obama shares that view,'' said one of his top legal advisers, Harvard law professor Laurence Tribe.
Previously Considered
McCain's choices will be constrained should the Democrats expand their 51-49 Senate majority. The nonpartisan Cook Political Report forecasts a Democratic gain of four to seven Senate seats.
``If a Republican president is making a selection with a Democratic Senate, confirmation will be a big issue,'' Brand said.
That dynamic might push McCain toward a compromise, such as Maureen Mahoney, 53, a Washington appellate lawyer at Latham & Watkins. Her appointment would make some conservatives uneasy, because she lacks a track record as a judge and argued in favor of racial preferences in college admissions in a 2003 Supreme Court case.
At the same time, Mahoney has Republican credentials. She serves on McCain's legal advisory committee and defended the high court ruling that sealed Bush's election in 2000.
Female Judges
Other women likely to appear on McCain's short list include federal appeals court judges Diane Sykes, 50, Consuelo Maria Callahan, 58, and Reena Raggi, 57. Callahan is Hispanic.
McCain, a 71-year-old Arizona Republican, might also consider a sitting senator, possibly 56-year-old John Cornyn of Texas, or Judge Michael McConnell, 53, whose nomination by Bush to the Denver-based 10th Circuit received some Democratic support.
Still, O'Connor herself has said the court needs another woman. Calls for another female justice have grown even louder than those for the court's first Hispanic, Brand said.
Should McCain be elected, ``there will be a huge amount of pressure for him to nominate another woman,'' Brand said.
July 15 (Bloomberg) -- The economic boost from U.S. tax rebates began to fade in June and inflation pressures increased, reports today showed, pointing to a possible contraction later this year.
Retail sales rose 0.1 percent from the previous month, the Commerce Department said today in Washington. That was less than economists forecast. At the same time, the Labor Department reported that producer prices jumped 1.8 percent, the most since November. From a year ago, prices climbed 9.2 percent, a surge unseen since 1981.
``The momentum faded at the end of the quarter,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``Consumer spending will be weaker in coming months.''
The figures increased concern that falling home values, rising unemployment and tighter credit will cause consumers to retrench even more. Traders pared bets that the Federal Reserve will increase interest rates by the end of the year.
Fed Chairman Ben S. Bernanke today abandoned the message of the central bank's June policy statement that downside risks to growth had ``diminished somewhat,'' while maintaining its warning on inflation. Bernanke's shift reflects renewed turmoil in markets that forced the Treasury and Fed to mount a rescue of Fannie Mae and Freddie Mac this week.
There are ``significant downside risks to the outlook for growth,'' and ``upside risks to the inflation outlook have intensified,'' he said in testimony to the Senate Banking Committee in Washington.
Dollar Declines
The dollar extended losses against the euro after Bernanke's remarks, while the yield on the benchmark 10-year Treasury note also fell, 9 basis points from yesterday to 3.77 percent at 10:05 a.m. in New York.
Retail sales were projected to rise 0.4 percent after an originally reported 1 percent gain the prior month, according to the median estimate in a Bloomberg News survey of 81 economists.
Sales excluding automobiles increased 0.8 percent. They were forecast to increase 1 percent from the prior month, according to the survey median.
Americans bought fewer cars, furniture, electronics and building materials as gasoline prices soared. Today's report showed sales at automobile dealerships and parts stores dropped 3.3 percent, the most since February 2006.
Energy Costs
Energy prices also pushed producer expenses higher. Excluding food and energy, the increase was 3 percent from a year earlier, the same as the prior month. Food was 1.5 percent more costly, after a 0.8 percent change the previous month. Vegetables jumped 14.7 percent.
``It was primarily confined to the energy sector,'' said Lindsey Piegza, an analyst at FTN Financial in New York, which correctly forecast the rise in the core rate. ``There is risk that in the future they could seep through and cause an inflationary spiral, but right now inflation is going to take a back seat to the slowing economy'' on the list of Fed concerns.
The retail numbers are consistent with industry figures which signaled Americans are shunning big-ticket purchases. Cars and light trucks sold in June at a 13.6 million annual pace, the weakest since 1993, according to data issued earlier this month.
Sales of furniture fell 1.4 percent and purchases of electronics dropped 0.6 percent. Both were the biggest declines so far this year.
Pump Prices
A surge in receipts at service stations as gasoline prices rose to a record prevented total sales from falling. Filling station purchases jumped 4.6 percent last month, the most since November. Excluding gas, retail sales declined 0.5 percent, the biggest drop this year.
Regular unleaded fuel prices topped $4 a gallon for the first time in June and have continued climbing this month, according to AAA.
The jump in fuel prices may have also caused Americans to limit visits to restaurants. Sales at food services and bars fell 0.2 percent.
Retailers that gained sales last month included grocery, health care, clothing and sporting goods stores.
Excluding autos, gasoline and building materials, the retail group the government uses to calculate gross domestic product figures for consumer spending, sales rose 0.3 percent, after a 0.7 percent increase in May. The government uses data from other sources to calculate the contribution from the three categories excluded.
Rising energy costs erode households' purchasing power and add to the risk that companies will try to raise prices, triggering a broader pickup in inflation.
Fed Policy
The twin concerns may prompt Fed policy makers to keep interest rates unchanged this year, a Bloomberg survey last week showed. Economic growth will slow to a 0.5 percent annual rate in the fourth quarter, the weakest pace in six years, and consumer spending will post the smallest gain since 1991, according to the economists surveyed.
The government distributed $86.1 billion in stimulus checks through July 4, out of a total plan of about $110 billion. Rebate-linked promotions boosted sales at retail stores open at least a year to a better-than-forecast 4.3 percent gain in June, according to the International Council of Shopping Centers.
The industry figures for same-store sales account for about 17 percent of total retail purchases, which make up almost half of consumer spending. Consumer spending itself accounts for more than two-thirds of the economy.
Wal-Mart's same-store sales jumped 5.8 percent, the most in four years. The Bentonville, Arkansas-based company's U.S. discount stores and its Sam's Club membership warehouses drew additional customers who spent more on average per visit than in prior months.
``We continue to see a shift in the overall mix toward fuel, food and consumables, as our members manage through the current environment,'' Doug McMillon, Sam's Club president and chief executive officer, said in a statement on July 10.
July 15 (Bloomberg) -- Brazilians' biggest shopping spree since 2001, fueled by rising wages and credit, is drawing investments to smaller cities as retailers chase consumers outside of Sao Paulo and Rio de Janeiro.
Macae, a former fishing village that's now the base for Brazil's offshore oil production, will open its first mall in September, meaning its 169,000 residents won't need to drive three hours to Rio de Janeiro to shop. The statistics agency today said sales rose 10.5 percent in May from a year ago.
Consumer spending is driving economic growth in some of the poorest corners of Brazil, helping shield the economy from its first decline in exports in two years. CBL & Associates Properties, Inc. the third largest mall operator in the U.S., chose Brazil's 151st-largest city to build its first overseas shopping center as retail sales slump in the U.S.
``This is probably the first time in history we've seen this boom in consumption penetrate so deep into the countryside,'' said Alfredo Coutino, senior economist for Latin America at Moody's Economy.com in West Chester, Pennsylvania.
Brazil, Latin America's largest economy, expanded 5.8 percent in the first quarter and 6.2 percent in the last three months of 2007, the fastest rate in three years. It's benefiting from surging domestic demand, public spending and rising prices for soy and other commodities.
Retail, supermarket and grocery store sales have increased more than 10 percent in four of the first six months of 2008.
Consumers, Amazon
Average real incomes adjusted for inflation in Brazil's six largest metropolitan regions jumped 12.7 percent, to 1,208 reais ($758) in May, as economic growth has accelerated the past three years, according to the national statistics agency. Bank lending in May rose 32.4 percent from a year earlier.
The strengthening muscle of the Brazilian consumer is being most intensely felt in the impoverished north and northeast.
In Maranhao, Brazil's second-poorest state, retail sales surged by 14.3 percent last year, above the national average of 9.6 percent. Sadia SA, the country's second-biggest food maker, is investing 10 million reais to expand a distribution center in the Amazon city of Manaus to satisfy demand from more Brazilians exiting poverty.
``As Brazil makes more money selling oil and commodities, the shopping dollars will follow and we'll see more malls being built,'' said Rich Moore, a real estate investment trust analyst for RBC Capital Markets in Cleveland.
At least 30 malls are under development after sales at the country's 387 shopping centers surged 16 percent to $58 billion reais last year, says Marcelo Carvalho, president of Brazil's Association of Shopping Centers. He estimates growth will slow to 11 percent this year.
Macae
Stephen Lebovitz, president of Chattanooga, Tennessee-based CBL, said the company is investing in Macae because of the town's quick growth and lack of shops.
Macae is the base for ships heading out to the offshore oil platforms in Campos Basin, where Brazil got about 85 percent of its oil production last year. Gross domestic product per capita in Macae jumped 64 percent from 2002 to 2006, to 36,000 reais, triple the national average.
CBL is expanding beyond the U.S. as an economic slump in its home market reduces demand for consumer goods. The company's net income may drop 38 percent in 2008, the third consecutive annual decline, according to the median estimate of analysts surveyed by Bloomberg. CBL shares fell 46 percent in the past 12 months.
The mall in Macae will cost 60 million reais to build. It's 65 percent leased before its September opening date.
`100 Percent Leased'
Economic growth is also stoking inflation, which accelerated to a 31-month high of 6.06 percent in June. The central bank has raised interest rates twice this year in a bid to tame prices.
CBL's minority partner in the Brazilian joint venture is TencoCBL. Chief Executive Officer Eduardo Gribel said he has commitments from CBL to spend $120 million through 2009 building malls in Macae and four other markets where no shopping centers currently exist. Among their prospects: the sweltering Amazonian port city of Macapa.
Lebovitz declined to say how much CBL plans to spend.
The mall in Macae will yield annual returns almost double the 6 percent to 8 percent average of U.S. malls, depending on the outlook for inflation and how much the central bank raises borrowing costs from the current 12.25 percent, Gribel, 54, said in an interview after meeting with the mall's future tenants at the construction site.
Brazil's central bank is expected to raise rates to 14.25 percent this year, according to a July 14 central bank survey.
``There's always a risk of a blip in the economy, but I've never been in a mall in Brazil that's not 100 percent leased,'' CBL's Lebovitz said.
July 15 (Bloomberg) -- President George W. Bush urged Congress to act quickly on legislation intended to bolster Fannie Mae and Freddie Mac and stabilize the mortgage markets.
The two federally charted companies play a ``central role'' in the nation's housing system, Bush said today at a White House news conference.
``The first step is to make sure there is confidence and stability in the mortgage markets,'' he said.
The U.S. economy has been battered by turmoil in the housing market and record crude oil prices. Growth has been ``slower than we would have liked, but it was growth nonetheless,'' Bush said. ``We are going through a tough time.''
Treasury Secretary Henry Paulson on July 13 asked Congress for authority to buy equity stakes in Fannie Mae and Freddie Mac, the biggest U.S. mortgage finance companies, and increase the government's credit lines to the companies.
``Hopefully these measures will instill the confidence in the people,'' Bush said.
Fannie Mae and Freddie Mac plunged in early trading in New York. Washington-based Fannie Mae has fallen about 76 percent this year, and Freddie Mac, based in McLean, Virginia, has dropped about 79 percent.
Bush also sought to assure the public that there isn't any broad threat to deposits in banks. The U.S. banking system ``basically is sound,'' he said.
Growth Risks
Bush spoke as Federal Reserve Chairman Ben S. Bernanke was testifying before the Senate Banking Committee, where he said the economy is facing ``significant downside risks'' to growth and the threat of higher inflation.
Economists forecast economic growth will dwindle to a 0.6 percent pace by the final three months of 2008, the weakest pace in six years, according to the median estimate in a monthly Bloomberg News survey.
Bush said he had no plans to offer a second economic stimulus package beyond the tax rebates that already have gone out to taxpayers.
``We're always open minded to things, but we'll see how this one works,'' he said.
To deal with rising energy costs, Bush said he wants Congress to act quickly to remove a ban on offshore drilling, a move that has been opposed by Democratic leaders who have majorities in the House and Senate. Yesterday, he rescinded an executive order placing a moratorium on drilling on the outer continental shelf that had been put in place by his father, former President George H.W. Bush.
Bush argued that those areas can be tapped without spoiling the environment.
``It seems like it makes sense to say to the world we are going to use new technologies to explore for oil and gas in the United States,'' Bush said. ``There is no short term solution.''
He again said he opposed using oil from the Strategic Petroleum Reserve, saying that ``doesn't address the fundamental issue.''
For the time being, Bush said, there will continue to be ``upward pressure on price'' until more supply is brought to the market.
July 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said risks to both U.S. growth and inflation have increased, abandoning officials' June assessment that threats to the expansion had ``diminished somewhat.''
There are ``significant downside risks to the outlook for growth,'' and ``upside risks to the inflation outlook have intensified,'' Bernanke said in semiannual testimony on the economy to the Senate Banking Committee in Washington.
Bernanke's shift reflects renewed turmoil in markets that forced the Treasury and Fed to mount a rescue of Fannie Mae and Freddie Mac this week. He said that stabilizing financial markets remains ``a top priority,''
The Fed chief spoke less than two hours after government figures showed that the economic boost from U.S. tax rebates began to fade in June and inflation pressures increased. The dollar and stocks extended declines in the minutes after Bernanke's remarks, before recouping some losses.
``Clearly, policy is on hold,'' said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Connecticut, and a former Fed economist. ``They are relatively concerned about the second half of the year.''
Energy Impact
Bernanke cited higher energy prices, reduced access to credit and a further deepening in the housing recession as dangers to growth. At the same time, he said: ``We must be particularly alert to any indications, such as an erosion of longer-term inflation expectations, that the inflationary impulses from commodity prices are becoming embedded'' in wages and prices.
The Standard & Poor's 500 Index dropped to its lowest level since 2005, and was down 1.3 percent at 1,211.51 at 11 a.m. in New York. The U.S. currency was at 1.5970 per euro after reaching a record low earlier in the day.
Retail sales rose 0.1 percent from the previous month, the Commerce Department reported today, less than economists forecast. Producer prices jumped 1.8 percent, the most since November, the Labor Department said. From a year ago, prices climbed 9.2 percent, a surge unseen since 1981.
Bernanke's comments today are his first on monetary policy and the economic outlook since the Federal Open Market Committee's June 25 decision to leave the benchmark interest rate unchanged at 2 percent, pausing after seven cuts totaling 3.25 percentage points since September.
``Helping the financial markets return to more normal functioning will continue to be a top priority of the Federal Reserve,'' the Fed chairman said.
Fannie, Freddie
The comments come two days after the Treasury and Fed moved to provide a backstop for Fannie Mae and Freddie Mac, which have fallen more than 45 percent in six days.
Bernanke said consumer spending is ``likely to be restrained over coming quarters,'' and businesses are ``likely to be cautious with their spending in the second half of the year.''
Federal tax rebates provided ``timely support'' for strained households, he said. That's helped household spending hold up better than was forecast, he added.
Declines in home prices ``have contributed to the rising tide of foreclosures,'' the Fed chairman said. ``Foreclosures have, in turn, intensified the downward pressure on home prices in some areas.''
In new forecasts, Fed officials raised their projections for economic growth and inflation for this year, while reiterating their outlook for faster growth in 2009.
New Forecasts
Fed governors and district bank presidents now see the economy expanding 1 percent to 1.6 percent this year, up from 0.3 percent to 1.2 percent in their April outlook. Consumer prices will rise 3.8 percent to 4.2 percent this year compared with a projected range of 3.1 percent to 3.4 percent in April. The economy should expand at a 2 percent to 2.8 percent rate in 2009, identical to the April forecasts.
Risks to the economic outlook have risen after the Standard and Poor's Financials Index dropped 17 percent and Fannie Mae and Freddie Mac, the largest sources of U.S. home financing, slumped. Four days ago, the Federal Deposit Insurance Corp. took over IndyMac Bancorp Inc. as the California lender collapsed under soaring losses.
``Most participants viewed the risks to their projections for gross domestic product growth as weighted to the downside,'' the Fed said in a section of its monetary policy report where it describes the forecasts. ``Most participants viewed the risks to their inflation projections as weighted to the upside.''
Risks to Outlook
Uncertainty in the forecasts was ``higher than normal,'' the Fed said, due to the ``duration and effects'' of financial strains on growth and ``the extent of pass-through'' of commodity prices to core inflation. Bernanke said that pass- through so far has been ``limited.''
The economy grew at an annualized rate of 1 percent in the first quarter, capping the weakest six months in five years. Financial turbulence is crimping credit to housing markets and businesses, while a near doubling of oil prices in the past year has pushed consumer expectations of inflation higher.
``The effects of the housing contraction and of the financial headwinds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities, which have sapped household purchasing power,'' Bernanke said.
American households foresee average annual inflation of 3.4 percent over the next five years, the highest expectation since 1995, according to the Reuters/University of Michigan survey.
`Temporarily Higher'
``Inflation seems likely to move temporarily higher in the near term,'' Bernanke said.
Bernanke's hearing today will be ``brief'' in order to accommodate a second gathering with him, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox. Democratic Senator Christopher Dodd of Connecticut, who chairs the committee, set the second hearing yesterday to address financial markets.
Tomorrow, Bernanke appears before the House Financial Services Committee for the second day of his semiannual testimony.
The Federal Open Market Committee next meets Aug. 5 in Washington. Investors expect the central bank to leave the overnight interbank lending rate unchanged at 2 percent again. Traders see a 59 percent chance of an increase to 2.25 percent or higher by the end of the year, based on futures prices.
July 15 (Bloomberg) -- U.S. stocks fell and the dollar dropped to a record low against the euro as investors lost confidence in the government's rescue of Fannie Mae and Freddie Mac and Federal Reserve Chairman Ben S. Bernanke said the risks of an economic slowdown and faster inflation are increasing.
Fannie Mae and Freddie Mac, the largest U.S. mortgage- finance companies, declined more than 20 percent each. Citigroup Inc. plunged to the lowest level since the company was created through a merger in October 1998. The market pared its decline as oil retreated by more than $6 a barrel.
The Standard & Poor's 500 Index lost 14.54 points, or 1.2 percent, to 1,213.76 at 11:41 a.m. in New York. The Dow Jones Industrial Average retreated 111.05, or 1 percent, to 10,944.14. The Nasdaq Composite Index decreased 14.72, or 0.7 percent, to 2,198.15. Three stocks fell for each that rose on the New York Stock Exchange.
``There's a feeling among investors that there's no place to hide,'' said Joseph Quinlan, the New York-based chief market strategist for the global wealth and investment management division of Bank of America Corp., which oversees $607 billion. ``Sentiment has turned sour globally. It's not just in the U.S., it's across the globe.''
Nine of 10 industries in the S&P 500 fell, extending the index's slump from an October record to more than 22 percent.
The stock market opened lower on concern the government's support for Fannie Mae and Freddie Mac won't help shareholders, then extended its retreat after Bernanke told Congress there are ``significant downside risks to the outlook for growth,'' and ``upside risks to the inflation outlook have intensified.''
Benchmark indexes erased about half of their declines as oil slid on concern the slowing U.S. economy will curtail demand.
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