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Bernanke: Danger of downturn appears to have faded

(Agencies)
Updated: 2008-06-10 10:18

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.

Bernanke spoke Monday evening to a conference on understanding inflation and the implications for Fed policymakers in setting interest rates. The forum was sponsored by the Federal Reserve Bank of Boston. His comments on the economy's outlook were fairly brief and were part of a larger, mostly academic speech.

Last week, Bernanke sent his strongest signal yet that the Fed's rate-cutting campaign was probably over for now because of growing concerns that soaring oil and other commodity prices (along with a weakened dollar) are aggravating inflation.

To help brace the economy, the Fed dropped rates in late April to 2 percent, a nearly four-year low, continuing a rate-cutting campaign that started last September.

Many economists believe the Fed will hold rates steady at its next meeting on June 24-25 and probably through much, if not all, of this year. However, some believe inflation could flare up and force the Fed to begin boosting rates later this year or next year.

Inflation forecasting is important to Fed policymakers when determining the best course on interest rates. Even with extensive research over the years, much remains to be learned about both inflation forecasting and inflation control, Bernanke said. And there are areas where additional research could prove helpful.

Policymakers and analysts often have relied on information from commodity futures markets to help shape inflation forecasts, Bernanke said. In recent years, though, information from futures markets has "underpredicted commodity price increases ... leading to corresponding underpredictions of overall inflation," he said. The "poor recent record" on that front raises the question of whether policymakers should continue to use this source of information and, if so, how, Bernanke said.

Despite the recent record, Bernanke said he didn't think it was reasonable to ignore information about supply and demand culled by futures markets. However, it does seem reasonable, he said, to treat such information as highly uncertain.

Working to make economic data timelier and more accurate also would be useful to policymakers trying to divine inflation's direction. Moreover, it would also be helpful for policymakers to know more about how people's inflation expectations are influenced by Fed interest rate actions, Fed communications and economic developments such as oil price shocks.

"Much evidence suggests that expectations have become better anchored than they were a few decades ago, but that they nonetheless remain imperfectly anchored," Bernanke said.

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