Bernanke May Boost Interest Rates

The Financial Sector Has Taken The Fed Chairman's Tough Anti-Inflation Talk As A Signal That He Will Raise Interest Rates

(AP)  Ramping up his tough anti-inflation talk, Federal Reserve Chairman Ben Bernanke is raising expectations on Wall Street and elsewhere that the central bank could boost interest rates sooner than anticipated if high oil and food costs threaten to spur a broader bout of spiraling prices.

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?"

You would have thought Bernanke would have learned something from Greenspan, apparently he hasn''t.

[usbrit-2009]

Posted by aldon61

Well said! I used to go line by line with this troglodyte myself, but you might as well be reading the bible to a monitor lizard, so I quit. Keep up the good work as long as you can though.

[mrright5]

Democrats Hate Bush

Posted by demslie



You mean most US citizens hate what he has done to America, the majority of Republicans included!

[davidlar2]

Interest rates absolutely need to go up. Negative real interest rates (interest rates below the rate of inflation) are destructive to the economy in the end.

Unfortunately, I don''t believe Bernanke has the brains or the balls to actually raise interest rates.

[aldon61]

--------------------------------------------------------------------------------

Posted by demslie at 09:03 AM : Jun 11, 2008

Let''s take these one at a time.

1. Bush, you''re probably right on this one.

2. Military; you''re way off base here, we love the military and many of us have served proudly. What we hate is an "unecessary war".

3. Capitalism; wrong again, love it! We do believe in helping others less fortunate though, that''s probaly what you mean.

4. Christianity; WOW, where are you coming from? Most of us (not all) are totally Christian and many of us attend church regularly, do you?

5. Family values; this is a hard one because the term is highly subjective. But if you mean raising our children to know right from wrong, respecting one''s parents and elders, working hard, acknowledging that we are subject to a higher power, then you''re wrong again.

6. Rich people; no, we don''t hate rich people. We don''t like wealth without responsibility though; the wealthy of our nation, like Bill Gates, Warren Buffet, Ted Turner are all to be admired. Each of these people have given literally billions of dollars to help others; how could we hate them? If you''re referring to Ken Lay, etal, again, we don''t hate them, we do hate their actions though.

Hope this set''s the record straight.

[usbrit-2009]

Democrats Hate Bush

Posted by demslie

Finally something I can agree on with this GOPig troll. The rest of its'' latest screed is the same BS as usual.

[usbrit-2009]

Re money and Iraq - from the BBC yesterday

"A BBC investigation estimates that around $23bn (#11.75bn) may have been lost, stolen or just not properly accounted for in Iraq.

For the first time, the extent to which some private contractors have profited from the conflict and rebuilding has been researched by the BBC''s Panorama using US and Iraqi government sources.

A US gagging order is preventing discussion of the allegations.

The order applies to 70 court cases against some of the top US companies."

It goes on to say "the gag order is unlikely to be lifted while President Bush is in office."

[robroyh390]

The price of EVERYTHING is going up, and Bernanke the Brain doesn''''t have enough sense to figure out why. Not a surprise, when you take into account who appointed him.


Posted by omnibus66 at 07:42 AM : Jun 11, 2008"

Yeah and we all know who voted for the ******* who appointed Bernanke - step forward the american people.....sure hope you dumb *** enjoyed that beer who had with the retarded ape

[robroyh390]

Last week, Bernanke said he didn''t see the country headed toward a repeat of a dangerous 1970s-style wage-price spiral"

Yeah - this was the same dumb *** whoo supported his beloved buddy Bubbles Greenspan''s claims that the assinine monetary policies and assinine tax cuts of Chimpy''s first term were guaranteed to ensure unsurpassed economic growth, low inflation, and ever inncreasing tax revenues

Where''s the prognosis from SpongeBob Square Pants - that''s far more likely to be accurate than that of d1ckhead Bernanke

[naucoming4u]

Bernanke thinks raising interest rates will help our economy.

The captain of the Titanic thought a Dixie cup would be adequate in bailing out the Titanic.