WASHINGTON – Even with the economy in a slowdown mode, Federal Reserve Chairman Ben Bernanke made clear Tuesday that policymakers want to see inflation continue to recede, suggesting the Fed probably won’t be cutting interest rates any time soon.
In his most extensive comments on the economy since summer, Bernanke struck a largely positive tone that the economy should be able to weather the strains coming from the housing slump and the struggling auto industry.
The slowdown “appears to be taking place roughly along the lines envisioned,” Bernanke observed in remarks to the National Italian American Foundation in New York.
Outside housing and autos, economic activity remains solid, he said. “Overall, the economy is likely to expand at a moderate pace going forward,” Bernanke said.
The Fed chief also was hopeful that more moderate economic growth would continue to gradually ease inflation pressures over the next year or so.
Yet, risks from inflation or a worse-than-expected housing slump could throw a wrench in the outlook, Bernanke said.
The slump in the once sizzling housing market could turn out to be deeper than expected, putting an even greater drag on overall economic activity. Or, Bernanke surmised, economic growth could rebound more strongly than expected, which could lead to a flare-up in inflation.
“A failure of inflation to moderate as expected would be especially troublesome,” he said.
Overall inflation has showed signs of improving in recent months as once surging energy prices have calmed down. However, “core” prices – which exclude energy and food and are closely watched by the Fed – still remain “uncomfortably high,” Bernanke said. Looking ahead, Bernanke said he expects those core prices to moderate gradually over the next year or so.
But he made clear the Fed will keep a close eye on the matter, especially on labor costs, which can spark inflation if they grow rapidly.
Although the Federal Reserve has left interest rates alone since August, Bernanke repeated the central bank’s interest in keeping open the possibility of a rate increase down the road, if such action would be needed to fend off inflation.
To thwart inflation, the Fed had hoisted interest rates 17 times since June 2004, its longest string of increases in its history. With the economy slowing, the Fed has stayed on the sidelines since August. Many economists believe the Fed will keep its finger on the interest rate pause button when it meets next on Dec. 12, the last such session this year.
Economists said Bernanke’s comments dashed hopes held by some in financial markets that the Fed would soon cut interest rates. “His speech pours water on any notion of a rate cut around the corner,” said Richard Yamarone, economist at Argus Research.
Stuart Hoffman, chief economist at PNC Financial Services Group, agreed, adding: “I think he offered a message of some optimism on the U.S. economy but acknowledged the wide uncertainty that exists in things that could go wrong for the economy.”
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