Over the past week, Bernanke has been sounding the alarm ever louder about the threat of inflation.
In his latest remarks on Monday evening, Bernanke played down the May spike in the nation's unemployment rate, saying the danger that the economy has fallen into a "substantial downturn" has faded.
At the same time, Bernanke sent a fresh warning that the Fed will be on heightened alert against inflation dangers, especially any signs that investors, consumers and businesses think prices will keep going up and change their behavior in ways that will aggravate inflation.
The Fed "will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation," Bernanke said.
The Fed chief and his colleagues have been signaling that the Fed's rate-cutting campaign, started in September, is probably over given mounting concerns about inflation. And, little by little, Bernanke is preparing people for the prospects of higher rates down the road.
For now, many analysts still expect the Fed to hold rates steady at 2 percent, a four-year low, when policymakers meet next on June 24-25. However, Bernanke's remarks raise the odds that rates could go up later this year, instead of next year as many have been predicting, should inflation show signs of worsening, they said.
"I think the Fed wants to wait until the economic coast is clear to raise rates," said Mark Zandi, chief economist at Moody's Economy.com. "But Bernanke is saying the Fed will sacrifice near-term economic growth to the altar of stable inflation" should prices start to take off, he added.
Bernanke said a government report last week showing the unemployment rate rising from 5 percent in April to 5.5 percent in May - the biggest one-month jump in two decades - was "unwelcome." However, the Fed chief said other forces should "provide some offset to the headwinds that still face the economy."
The Fed's powerful doses of interest rate cuts, along with the government's $168 billion stimulus package, further progress in the repair of problems in financial and credit markets, a gradual ebbing of the drag from the deep housing slump, and still solid demand from abroad for U.S. exports should help the economy over the remainder of this year, he said.
"Inflation has remained high," largely reflecting sharp increases in the prices of globally traded commodities, Bernanke said on Monday. "The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations."
In the first four months of this year, consumer prices have risen at an annual rate of 3 percent. That's down from a 4.1 percent rise - the biggest in 17 years - registered in 2007, but it's still higher than the Fed is comfortable with.
Oil prices, which on Friday registered their biggest single-day leap, moderated Tuesday and settled at $131.31 a barrel as the dollar gained some ground against the euro. Retail gasoline prices, however, marched to a new record average of over $4.04 a gallon.
"As consumers, we all buy food and gas with high frequency, so sharp relative price movements for these goods get our immediate attention," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a speech Tuesday. A situation where people would keep expecting such price increases is "clearly an outcome to be avoided," he said.
If these high energy prices force companies to boost their prices for goods and services, inflation will spread dangerously through the economy. And if workers demand - and receive - higher wages to help them stay ahead of escalating prices, that could worsen inflation.
Last week, Bernanke said he didn't see the country headed toward a repeat of a dangerous 1970s-style wage-price spiral. At that time, the country suffered from "stagflation," a toxic mix of stubborn inflation and stagnant growth.
"The Fed is committed to not repeating the mistakes of the 1970s," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group. "Bernanke appears to believe that inflation risks are rising relative to the downside risk to the economy," she added. "The Fed is still likely to hold rates steady at the next meeting but may signal a somewhat tougher stance on inflation." Reaser predicts the Fed's key federal funds rate, now at 2 percent, will climb to 3.5 percent by the end of 2009.
Bernanke is trying to use tough talk to rein in inflation expectations of consumers, investors and businesses. "The markets are starting to prepare themselves for an earlier rate hike. That may be exactly what the Fed wants to ensure that inflation expectations remain tethered," Zandi said.
With the economy bruised badly by the housing, credit and financial crises, some analysts insist it would be a mistake for the Fed to boost rates too soon.
"Rising interest rates now would be the kind of policy the Federal Reserve pursued in 1929," said Peter Morici, an economist and business professor at the University of Maryland. "Is that the kind of signal a central banker and student of the Great Depression wants to send to fragile markets?"