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Bernanke sees economy slowing

Fed chief stresses his concern about core inflation in remarks to bankers, but says US consumers are in decent financial shape.

Federal Reserve Chairman Ben Bernanke said Monday the Fed needed to be vigilant to make sure inflation stays under control even as the U.S. economy starts to shift to a slower pace of growth.

"It is reasonably clear that the U.S. economy is entering a period of transition," Bernanke told a group of bankers. "The anticipated moderation of economic growth seems now to be under way."

Despite forecasts of easing growth, the U.S. central bank chief expressed concern over core inflation, saying the pace of increase in non-food, non-energy prices measured over both the past three and past six months was at levels that "if sustained" would be at or above the upper end of the range he views as consistent with price stability.

"These are unwelcome developments," Bernanke said.

"With the economy now evidently in a period of transition, monetary policy must be conducted with great care and with close attention to the evolution of the economic outlook as implied by incoming information," he said. "Given recent developments, the medium-term outlook for inflation will receive particular scrutiny."

Click here for the Bernanke's comments on the outlook for the economy and the implications for monetary policy.

The Fed chairman said the cumulative increases in energy and other commodity prices may have been big enough to account for "some" of the recent pickup in core prices, and he noted that futures markets do not expect oil prices to keep rising.

Still, he noted oil and other commodity prices were often volatile and said: "Possible future increases in these prices remain a risk to the inflation outlook."

Bernanke also noted that both survey measures and financial market gauges of expected inflation had moved higher in recent months. "As yet, these expectations measures have remained within the ranges in which they have fluctuated in recent years, but these developments bear watching," he said.

The Fed chief's comments led traders in interest-rate futures markets to increase bets that the U.S. central bank would raise benchmark borrowing costs at its upcoming meeting on June 28-29. Stock prices ended sharply lower on Bernanke's inflation worries. and Treasury prices extended losses.

Yield-curve complication
Bernanke also said Monday that low long-term yields were complicating monetary policy because it was hard to be sure what was responsible for the flatness of the yield curve.

"It makes the analysis more difficult because you really have to make some judgments about why long rates are where they are. But in principle, you can compensate for them through your short-rate policy," he said during a panel discussion at the International Monetary Conference, sponsored by the American Bankers Association.

"So we try to make that assessment, and as we see changes in the long rate, we try to make assessments of why that is happening and adjust policy accordingly. But it does complicate the analysis in that respect," he said.

Bernanke also noted that there are important lags between monetary policy action and its impact on the economy and policy-makers must aim their action at future conditions.

"I like to think of it as the way a quarterback has to lead a receiver going down the football field. He has to throw where the receiver is going to be, not where he is at the current moment. It is the same with the economy," Bernanke said.

Consumers in decent shape
The Fed chief also stressed that U.S. consumers are in reasonably good financial shape and debt levels are not expected to be a major issue even as interest rates rise.

"I think under the current circumstances that the broad aggregate of U.S. consumers are in increasingly good financial condition," Bernanke said.

"It's true for example that debt holdings have risen considerably, but so have assets, so wealth has actually risen to relatively high levels compared to income in recent years," he said.

"Going forward, of course the concern would be that higher interest rates would lead to adjustments in those payments," but the majority of American debt holders have long-term fixed debt or adjustable-rate debt that will not be re-priced for several years, Bernanke said.

Bernanke also talked to the larger issue of tackling the U.S. current gap, noting it may take a number of years to cut it, but that it could be done in a stable way.

"We should keep in mind that it took more than 10 years for us to get from close to balance to the situation today and I think it will take a number of years for the situation to reverse in the other direction," Bernanke said.

http://money.cnn.com/2006/06/05/news/economy/bernanke_economy.reut/index.htm