A Warning From Bernanke, But No Hint Of A Rate Cut

BERLIN, Sept. 11 — The Federal Reserve chairman, Ben S. Bernanke, said on Tuesday that a high savings rate among oil-producing nations and Asian countries continued to help depress interest rates by keeping financial markets flush with cash.

But Mr. Bernanke warned against banking on the steady flow of cheap money — which helped stoke overly lax mortgage lending and the recently punctured housing bubble — over the long term.

Speaking in Berlin at a conference sponsored by Germanys central bank, Mr. Bernanke conspicuously avoided the topics that have fixated investors lately: the turmoil in credit markets, the risk of an American recession or the Feds readiness to lower interest rates at its policy meeting next week.

Instead, he gave an almost academic discourse about global trade imbalances and his theory that a global savings glut, concentrated in the worlds poorer countries, had helped keep interest rates low and contributed to the United States high rate of foreign indebtedness.

It was not clear whether the Fed chairman wanted to project a sense of calm ahead of the rate-setting meeting or whether he wanted to avoid sending any false signals on a decision over which Fed officials have differing views.

In Washington, Treasury Secretary Henry M. Paulson Jr. told reporters that the credit squeeze and the housing downturn would impose a penalty on American economic growth. But Mr. Paulson noted American exports had climbed sharply, thanks to strong global economic growth.

The positive is that the capital markets turmoil is taking place against the backdrop of a very strong global economy, Mr. Paulson said.

The Commerce Department reported that the nations trade deficit narrowed slightly in July, to $59.2 billion from an upwardly revised estimate of $59.4 billion in June.

Wall Street had little obvious reaction to Mr. Bernankes speech, though stock prices climbed gradually throughout the day, apparently on expectations that the central bank would lower the overnight federal funds rate at least one-quarter of a percentage point, to 5 percent, at its meeting next week.

The Dow Jones industrial average ended the day up 1.38 percent, at 13,308.39.

The real debate among investors is whether the Fed will cut rates more deeply — by a half percentage point — and what clues policy makers will offer about additional cuts before the end of the year.

Mr. Bernanke did not touch on those issues on Tuesday. But he did caution that the flood of cheap capital from abroad was likely to taper off in the decades ahead, possibly leading to higher interest rates, as countries like China save less and consume more.

The logic of the global savings glut suggests that, as the glut dissipates over the next few decades and thereby reduces the net supply of financial capital from emerging market countries, real interest rates should rise, he said.

Mr. Bernanke coined the phrase global savings glut in 2005 to explain the historically peculiar phenomenon of an industrialized world awash in cash from developing countries.

Some economists now believe that the flood of foreign money, some of it from investors seeking higher yields in the United States, contributed to the speculative bubble in housing prices and the explosive growth in high-risk mortgages that helped finance it. Others contend that the Federal Reserve played a major role as well, by cutting short-term interest rates to rock-bottom lows after the stock markets fall in 2000 and the recession in 2001.

Mr. Bernanke cautioned that the United States current-accounts deficit was unsustainable over the long term and that the eventual adjustment could prove disruptive.

Before his speech, Mr. Bernanke met with Chancellor Angela Merkel to discuss the American mortgage market crisis and the need for greater market transparency. Several German banks have had to be rescued in recent weeks as a result of their losses on American mortgage-backed securities.

European policy makers struck a largely upbeat tone on Tuesday, saying the European economy could weather the storm.

It is important to remark that credit losses were not significant enough to materially impact the soundness of core financial institutions, Jean-Claude Trichet, president of the European Central Bank, told the European Parliament.

Partly in response to the turbulence in credit markets, the European Central Bank decided last week to leave interest rates unchanged rather than lifting them as previously planned.

The European Commission, in a new report on Tuesday, predicted that the European economy would continue to expand at a healthy pace but warned that the turmoil in financial markets had tilted the balance of risks clearly to the downside.

The forecast said the 13-nation euro area would expand 2.5 percent in 2007, down from a prediction of 2.6 percent earlier this year. The full 27-nation European Union will grow by 2.8 percent instead of 2.9 percent, it said. It also revised its forecast for inflation slightly upward.

Carter Dougherty reported from Berlin and Edmund L. Andrews from Washington.

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