Higher interest rates ahead, Bernanke says

ECONOMY

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WASHINGTON --- Prepare for the end of record-low interest rates, Federal Reserve Chairman Ben Bernanke says. Just not yet.

Higher rates on credit cards, home equity loans and some mortgages will follow the Fed's eventual pullback of the trillions it injected into the economy. Savers will benefit, though. As rates gradually climb, certificates of deposit and savings accounts will finally pay more.

Bernanke indicated Wednesday the Fed is still months away from raising rates or draining most of the stimulus money it injected to rescue the financial system.

For now, the global recovery remains too fragile to pull back much on government stimulus. Europe is facing a debt crisis. And President Obama is making a push to cut taxes to stimulate job creation.

Bernanke discussed the Fed's plans in prepared remarks to a House committee hearing that was postponed because of the East Coast snowstorm. Bernanke chose to release the testimony because of interest from investors and others.

His testimony outlined the Fed's strategy for reeling in stimulus money once the economic recovery is more firmly rooted.

To fight the financial crises, the Fed pumped so much money into the economy for lending programs that its balance sheet swelled to $2.2 trillion -- more than double the pre-crisis level.

Bernanke said the central bank will likely start to tighten credit by boosting the rate it pays banks on money they leave at the central bank. Doing so would raise rates tied to commercial banks' prime rate and affect consumer loans.

Bernanke sought to bolster confidence on Wall Street and in Congress that once the economy is strong enough, the Fed has the tools and the will to raise rates and withdraw stimulus aid -- without causing another recession. The goal would be to prevent another speculative asset bubble from forming, such as in stocks or commodities, and ward off inflation.

The stock market initially sank, then steadied itself after hearing Bernanke's plans. Investors seemed relieved the plans didn't mark a shift in policy, and that they set a path for a more normal financial system. The Dow Jones industrial average closed with a modest loss of 20 points.

Using the rate it pays on banks' excess reserves to tighten credit would be a new strategy.

U.S. trade deficit surge signals rebound

WASHINGTON --- The U.S. trade deficit surged to a larger-than-expected $40.18 billion in December, the biggest imbalance in 12 months. The wider deficit reflected a rebounding economy that is pushing up demand for oil and other imports.

The Commerce Department said the December deficit was 10.4 percent higher than the November imbalance. It was larger than the $36 billion deficit economists had expected with much of the increase coming from a big jump in oil imports.

For December, exports of goods and services rose for an eighth consecutive month, climbing 3.3 percent to $142.70 billion. The increase was led by strong gains in sales of commercial aircraft, industrial machinery and U.S.-made autos and auto parts.

Imports were up 4.8 percent in December to $182.88 billion, led by a 14.8 percent surge in oil imports, which rose to the highest level since October 2008.

For all of 2009, the deficit totaled $380.66 billion, the smallest imbalance in eight years, as a deep recession cut into imports. However, economists believe the deficit will rise in 2010 as U.S. demand for imports outpaces U.S. export sales.

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