Federal Reserve & Interest Rates

Federal Reserve Chariman Ben S. Bernanke gave testimony to congress yesterday, expressing that his major concern is fighting recession.  Inflation remains a major concern, as the recent readings for the CPI (consumer price index) and the PPI (producer price index) showed a higher increase than originally expected.  Chairman Bernanke noted that inflation is a cause for concern, however, recession is a greater concern at this point, and will be at the forefront of upcoming monetary policy decisions.

Bernanke stated, “A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives of maximum employment and price stability in an environment of downside risks to growth, stressed financial conditions, and inflation pressures.”

The Chairman discussed the recent reports on inflation and noted, “Inflation could be lower than we anticipate if slower-than-expected global growth moderates the pressure on the prices of energy and other commodities or if rates of domestic resource utilization fall more than we currently expect.  Upside risks to the inflation projection are also present, however, including the possibilities that energy and food prices do not flatten out or that the pass-through to core prices from higher commodity prices and from the weaker dollar may be greater than we anticipate.”

He went on to say that if confidence in the ability of the FOMC to control inflation suffers with overall inflation highs persisting, it will “greatly complicate the task of sustaining price stability and could reduce the flexibility of the FOMC to counter shortfalls in growth in the future.”

As usual, Bernanke noted that the Fed will be closely monitoring inflation, but any actions necessary to spur economic growth will be taken.  That means if cutting rates will help economic growth, they are prepared to cut rates.  At this point, inflation is on the back-burner.  If and when the economy stabilizes, the Fed could begin to raise the rates and start to take more actions to calm the inflation situation.  It will take the better part of 2008 before we get to the point since, as Bernanke says, “Monetary policy works with a lag.”