Bernanke sets market expectations on inflation mgt

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Jun 24: Federal Reserve Chairman Ben S. Bernanke, by voicing concern about inflation and the slumping dollar, has fanned investor expectations for an interest-rate increase as soon as August. He may regret it. Raising rates may exacerbate the economic slowdown and roil banks whose losses sent their stocks down the most in a decade this month. Forgoing a rate boost next quarter risks damaging the Fed’s credibility and deepening its divisions. Already this year, three officials have dissented on rate decisions.

While Bernanke’s warning that the Fed will “strongly resist” a jump in inflation expectations led traders to bet on a rate increase, economists are more skeptical. All 101 in a Bloomberg News survey said the Federal Open Market Committee will keep the benchmark rate unchanged tomorrow and most analysts this month predicted officials will stand pat until 2009. “That’s the dangerous game,”said Scott Anderson, senior economist in Minneapolis at Wells Fargo & Co, the fourth- largest US bank by market value. “Instead of putting the shot across the bow on inflation,” Bernanke might have, “held off a few more months to let the credit crisis heal a little bit more.”

The Fed chief shifted stance after soaring costs of energy and imported goods threatened to stoke consumer price expectations.

Gasoline climbed 37 percent in the past year, according to AAA. Import prices excluding petroleum rose the most since 1988 in the 12 months to May, government figures show.

Bernanke said at a Boston Fed conference June 9 the risk of a ‘substantial downturn’ in the economy had diminished and accelerating inflation, “would be destabilising for growth.”

The previous week, he said the falling dollar caused an “unwelcome” increase in domestic prices and the Fed was “attentive” to the problem.