Fed’s Bernanke warns of inflation risk

The Financial Times

In remarks prepared for the speech, he added: “The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations. The Federal Open Market Committee [which sets interest rates] will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilising for growth as well as for inflation.”

Mr Bernanke’s comments are likely to be interpreted by economists as a signal that the Fed is prepared to raise its main interest rate above the current 2 per cent level later this year, if necessary.

The FOMC next meets two weeks from Tuesday and is widely expected to keep rates on hold.

In his speech, the Fed chairman said his improved outlook for growth was based on “the effects of the monetary and fiscal stimulus, a gradual ebbing of the drag from residential construction, further progress in the repair of financial and credit markets, and still-solid demand from abroad”.

However, he made clear that the US economy was not out of the woods. “The ongoing contraction in the housing market and continuing increases in energy prices suggest that growth risks remain to the downside.”

Mr Bernanke spoke after a senior official of the European Central Bank said that fighting inflation in the eurozone will remain the bank’s top priority even if it clashes with US attempts to prevent a further slide in the dollar.

Monday’s comments from Lucas Papademos, ECB vice-president, came after it emerged that US officials were concerned about the effect on the dollar of the ECB’s warning last week that it might increase its main interest rate next month.

President George W. Bush on Monday added to US expressions of concern about the weak dollar, saying: “As strong dollar is in our nation’s interests. It is in the interests of the global economy.”

Eurozone inflation, at 3.6 per cent, is far above the ECB’s target of an annual rate “below but close” to 2 per cent – and is expected to remain above that level significantly longer than previously expected.

Ben Bernanke, Federal Reserve chairman, believes that the danger of a “substantial downturn” in the US economy has abated over the past month, but that inflation risks are increasing.

In a speech on Monday night in Massachusetts, Mr Bernanke said: “Although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”