Fed chief optimistic inflation will subside
Fed chief optimistic inflation will subside
By Edmund L. Andrews
Copyright by The New York Times
Published: July 19, 2006
WASHINGTON Despite the recent acceleration in U.S. consumer prices, largely aggravated by record-high oil prices, the chairman of the Federal Reserve Board expressed optimism Wednesday that the central bank's interest rate increases over the past two years have already set the stage for inflation to subside.
"The economy appears to be in a period of transition," Ben Bernanke, the Fed chairman, said at a hearing of the U.S. Senate Banking Committee. The outlook, he said, was for somewhat slower economic growth, a slight increase in unemployment and a "broad-based" cooling of the nation's housing market.
Bernanke's suggestion was that the Fed's heavy lifting to fight inflation - 17 increases in overnight interest rates over the past two years - might almost be done, and that the effects of those earlier increases were now "in the pipeline."
Treasury notes rallied, stocks advanced - the Dow was up 193 points by Wednesday afternoon - and the dollar fell as traders interpreted him as indicating that the Fed has just about finished lifting rates after two years of tightening. Investors still anticipate at least one more increase to prevent inflation from getting out of hand.
Though Bernanke acknowledged that prices were climbing faster than the Fed expected back in February, the central bank's latest forecast called for the underlying rate of inflation to ease later this year and in 2007, when it would be just slightly above the level that the Fed was comfortable with.
The Fed's latest forecast anticipates that the country's economic growth will slow to an annual rate of less than 3 percent in the second half of this year - down from the pace of 5.6 percent in the first quarter of 2006 - and settle at 3 percent to 3.25 percent in 2007. The core rate of inflation, which excludes the volatile prices of food and energy, is expected to decline to about 2.25 percent in 2007 from about 2.5 percent this year.
Before Bernanke began his remarks, the government reported that consumer prices rose 0.2 percent in June, the smallest increase in four months and half of the 0.4 percent rise in May.
Bernanke has said that his definition of acceptable inflation is 1 percent to 2 percent, but he has also emphasized that central banks should avoid knee- jerk reactions to shocks like a surge in energy prices.
Bernanke did not say whether the central bank would raise its benchmark interest rate at its next policy meeting, Aug. 8. Instead, he repeated the Fed's statement from late June that "any additional firming" in the form of higher interest rates "will depend on the evolution of the outlook."
But he did send a strong signal about the Fed's overall thinking.
"The lags between policy actions and their effects imply that we must be forward looking, basing our policy choices on the longer-term outlook," Bernanke said in his prepared remarks. "In formulating that outlook, we must take account of the possible future effects of previous policy actions - that is, of policy effects still 'in the pipeline.'"
Bernanke acknowledged that the overall rate inflation was "higher than we had anticipated in February," mainly because of sharp increases in prices of energy and other commodities, and had been averaging 4.3 percent from January through May. But he indicated that the higher inflation was largely old news, and that the pace would subside if energy prices stabilized or declined.
He then pointed to a range of indicators that the economy was slowing, a trend that should ease inflationary pressures. Cooling home sales and a lower pace of residential construction indicated that the "slowing of the housing market appears to be more broad- based" than can be explained by seasonal factors or the vicissitudes of weather.
Consumer spending is likely to be restrained by the decline in mortgage- equity withdrawals and a slowdown in the rise of real estate prices, he said. And while wages are likely to climb and the labor market in many industries appears to be "tight," Bernanke expressed hope that higher labor costs will be offset by rising productivity and a willingness of companies to absorb higher costs.
In answering questions from lawmakers, Bernanke leaned more heavily on the uncertainties ahead. After saying that oil futures prices suggest energy prices will stabilize, he said with a bit of chagrin that futures prices have been bad predictors for oil prices in the past year. Every time oil prices reach a new high, he said, the futures markets indicate that prices will stabilize around that level - and then actual prices climb higher.
He also said that energy prices have clouded the outlook for monetary policy. "We wouldn't be talking about this if energy prices were still at $30 a barrel or $40 a barrel for oil," he said.
The message boiled down to this: It appears that the economy is responding to the rate increases of the past two years, and that it is on a trajectory toward slower but more sustainable growth with lower inflation. If that continues to be the case, then interest rates do not have to go much higher and are already, to use Bernanke's word Wednesday, about "normal." But if inflation expectations heat up, or energy prices shoot up even more, all bets are off.
By Edmund L. Andrews
Copyright by The New York Times
Published: July 19, 2006
WASHINGTON Despite the recent acceleration in U.S. consumer prices, largely aggravated by record-high oil prices, the chairman of the Federal Reserve Board expressed optimism Wednesday that the central bank's interest rate increases over the past two years have already set the stage for inflation to subside.
"The economy appears to be in a period of transition," Ben Bernanke, the Fed chairman, said at a hearing of the U.S. Senate Banking Committee. The outlook, he said, was for somewhat slower economic growth, a slight increase in unemployment and a "broad-based" cooling of the nation's housing market.
Bernanke's suggestion was that the Fed's heavy lifting to fight inflation - 17 increases in overnight interest rates over the past two years - might almost be done, and that the effects of those earlier increases were now "in the pipeline."
Treasury notes rallied, stocks advanced - the Dow was up 193 points by Wednesday afternoon - and the dollar fell as traders interpreted him as indicating that the Fed has just about finished lifting rates after two years of tightening. Investors still anticipate at least one more increase to prevent inflation from getting out of hand.
Though Bernanke acknowledged that prices were climbing faster than the Fed expected back in February, the central bank's latest forecast called for the underlying rate of inflation to ease later this year and in 2007, when it would be just slightly above the level that the Fed was comfortable with.
The Fed's latest forecast anticipates that the country's economic growth will slow to an annual rate of less than 3 percent in the second half of this year - down from the pace of 5.6 percent in the first quarter of 2006 - and settle at 3 percent to 3.25 percent in 2007. The core rate of inflation, which excludes the volatile prices of food and energy, is expected to decline to about 2.25 percent in 2007 from about 2.5 percent this year.
Before Bernanke began his remarks, the government reported that consumer prices rose 0.2 percent in June, the smallest increase in four months and half of the 0.4 percent rise in May.
Bernanke has said that his definition of acceptable inflation is 1 percent to 2 percent, but he has also emphasized that central banks should avoid knee- jerk reactions to shocks like a surge in energy prices.
Bernanke did not say whether the central bank would raise its benchmark interest rate at its next policy meeting, Aug. 8. Instead, he repeated the Fed's statement from late June that "any additional firming" in the form of higher interest rates "will depend on the evolution of the outlook."
But he did send a strong signal about the Fed's overall thinking.
"The lags between policy actions and their effects imply that we must be forward looking, basing our policy choices on the longer-term outlook," Bernanke said in his prepared remarks. "In formulating that outlook, we must take account of the possible future effects of previous policy actions - that is, of policy effects still 'in the pipeline.'"
Bernanke acknowledged that the overall rate inflation was "higher than we had anticipated in February," mainly because of sharp increases in prices of energy and other commodities, and had been averaging 4.3 percent from January through May. But he indicated that the higher inflation was largely old news, and that the pace would subside if energy prices stabilized or declined.
He then pointed to a range of indicators that the economy was slowing, a trend that should ease inflationary pressures. Cooling home sales and a lower pace of residential construction indicated that the "slowing of the housing market appears to be more broad- based" than can be explained by seasonal factors or the vicissitudes of weather.
Consumer spending is likely to be restrained by the decline in mortgage- equity withdrawals and a slowdown in the rise of real estate prices, he said. And while wages are likely to climb and the labor market in many industries appears to be "tight," Bernanke expressed hope that higher labor costs will be offset by rising productivity and a willingness of companies to absorb higher costs.
In answering questions from lawmakers, Bernanke leaned more heavily on the uncertainties ahead. After saying that oil futures prices suggest energy prices will stabilize, he said with a bit of chagrin that futures prices have been bad predictors for oil prices in the past year. Every time oil prices reach a new high, he said, the futures markets indicate that prices will stabilize around that level - and then actual prices climb higher.
He also said that energy prices have clouded the outlook for monetary policy. "We wouldn't be talking about this if energy prices were still at $30 a barrel or $40 a barrel for oil," he said.
The message boiled down to this: It appears that the economy is responding to the rate increases of the past two years, and that it is on a trajectory toward slower but more sustainable growth with lower inflation. If that continues to be the case, then interest rates do not have to go much higher and are already, to use Bernanke's word Wednesday, about "normal." But if inflation expectations heat up, or energy prices shoot up even more, all bets are off.
posted by Carlos T Mock at 7:45 AM
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