Slowing economy should ease inflation
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Still, he didn’t close the door to further interest rate increases.
Delivering his second economic report to Capitol Hill, Bernanke also stressed that these are difficult and uncertain times for Fed policy-makers, saying the climate of slowing growth and rising inflation puts the Fed in a tricky spot in terms of setting interest rates.
“The recent rise in inflation is of concern” to Fed policy-makers, Bernanke said in remarks to the Senate Banking Committee. He said that possible increases in the prices of oil as well as other raw materials “remain a risk to the inflation outlook.”
“Persistently higher inflation would erode” the economy’s performance “and would be costly to reverse,” Bernanke added. “The Federal Reserve must take account of these risks in making its policy decisions.”
On the other hand, a slowing economy should reduce inflation pressures going forward, he indicated. A slowing housing market and more cautious consumers ? whose spending accounts for a big chunk of economic activity ? are the main factors behind the moderation in overall economic growth, Bernanke said.
And, Bernanke said Fed policy-makers must remain mindful that the full impact of their previous interest rate increases have yet to make their way through the economy. Another reason to proceed with caution, he suggested.
The economy which grew in the first quarter at a 5.6 percent pace, the fastest spurt in 2-1/2 years, is expected to slow to a pace of around 3 percent or less in the second half of this year.
“The extent and timing of any additional firming that may be needed to address inflation risks will depend” on what incoming barometers say about the price climate and economic activity, Bernanke said.