- The Washington Times - Wednesday, July 19, 2006

2:23 p.m.

Federal Reserve Chairman Ben S. Bernanke told Congress today that record-high oil prices are a concern but that a slowing economy should moderate inflation down the road.

Still, he didn’t close the door to further interest rate increases.

Delivering his second economic report to Capitol Hill, Mr. Bernanke also stressed that these are difficult and uncertain times for Fed policy-makers, saying the climate of slowing growth and rising inflation puts the Fed in a tricky spot in terms of setting interest rates.

“There are risks in both directions, if I may say so,” Mr. Bernanke said during questioning before the Senate Banking Committee. “Clearly, we don’t want to tighten too much to cause our economy to grow more slowly than its potential. We are very aware of that concern. We think about it. We look at it. We try to evaluate it,” he told the panel.

“The risk in the other direction is that … were we to stop tightening too soon and inflation were to get higher and more persistent, then we would be faced with a situation of having to address that later on with perhaps even more rate increases,” he added.

Mr. Bernanke said the Fed must weight those countervailing forces on a meeting-by-meeting basis.

“The recent rise in inflation is of concern,” and possible increases in the prices of oil as well as other raw materials “remain a risk to the inflation outlook,” he said.

On the other hand, a slowing economy should reduce inflation pressures, he indicated. A slowing housing market and more cautious consumers — whose spending accounts for about two-thirds of economic activity — are the main factors behind the moderation in overall economic growth, Mr. Bernanke said.

He also said Fed policy-makers must remain mindful that the full impact of their previous interest rate increases have yet to make their way through the economy.

Asked about the possibility that the economy could see a substantial and potentially dangerous slowdown, Mr. Bernanke responded: “I don’t see a recession as being very likely.”

Wall Street rallied sharply higher as Mr. Bernanke’s testimony, while somewhat hawkish, removed some of investors’ chronic uncertainty over the Fed’s policies.

The economy, which grew in the first quarter at a 5.6 percent pace, the fastest spurt in 2 1/2 years, is expected to slow to a pace of about 3 percent or less in the second half of this year.

“The extent and timing of any additional firming that may be needed to address inflation risks will depend” on what incoming barometers say about the price climate and economic activity, Mr. Bernanke said.

The Fed has raised interest rates 17 times since June 2004. Since the Fed’s June meeting, energy prices have marched higher and oil prices have jumped to a record closing high of $77.03 a barrel Friday.

Sen. Jim Bunning, Kentucky Republican, who has expressed opposition to Mr. Bernanke’s elevation to Fed chairman, raised concerns that the Fed will push up rates too high and hurt the economy.

Saying he was disappointed in Mr. Bernanke’s leadership, Mr. Bunning maintained that “inflation is not out of control. The Fed is chasing an inflation monster that is just not there.”

The Fed’s next meeting is Aug. 8. Some economists believe the Fed will leave rates alone then to assess how the economy is doing. Others think the Fed could bump up rates again in August but then take a break, or pause, after that.

Either way, most economists agree that a respite from two years of rate pain is in sight.

“I think we are getting very, very close to the end of the tightening cycle,” said Mark Zandi, chief economist at Moody’s Economy.com. “He is laying the groundwork for a pause. If we don’t have a pause at the August meeting, then it will be certainly be at the meeting after that” in September.

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