No rate cut, Fed signals

Inflation remains threat, Bernanke says

November 29, 2006|By William Neikirk | William Neikirk,Chicago Tribune

WASHINGTON -- New signs appeared yesterday that the economy is stuck in a slowdown, but Federal Reserve Chairman Ben S. Bernanke made it clear he's more worried about inflation and is not prepared to cut interest rates anytime soon.

The head of the nation's central bank said in a New York speech that the "core" inflation rate, which excludes food and energy costs, "remains uncomfortably high" and could even trigger an interest-rate increase if not brought under control.

Over the next year, he said, the economy likely will pick up strength and grow at a modest but sustainable rate without further interest-rate reductions. His remarks dashed widespread assumptions on Wall Street that the weakening economy could cause the Fed to reduce interest rates over the next several months.

Bernanke made his remarks on a day that three economic indicators, for consumer confidence, home prices and durable-goods orders, appeared to signal a tapering of economic growth.

The next few days will provide a clearer picture of how consumers are spending in an economically crucial time of year, analysts said, as more figures come in from retailers across the country. So far sales appear to be more sluggish than expected.

Before Bernanke spoke, the National Association of Manufacturers' chief economist, David Huether, citing an 8.3 percent decline in durable- goods orders in October, said, "It's time for the Federal Reserve to consider easing monetary policy sooner rather than later."

But the Fed chief appeared unconcerned about such worries over economic growth. Other than the housing and automobile markets, Bernanke said, the economy appears strong and likely will look healthy going into next year.

The core inflation rate was 2.7 percent in October. The Fed has indicated it is comfortable when the overall increase in prices is 2 percent or lower. Bernanke said a tight labor market could be pushing up wages and prices. He added that the economy has less spare capacity to produce goods, and that also could be contributing to the inflation rate.

The stock market took his statements in stride, closing slightly higher, but the bond market rallied on the statements about inflation.

According to Chicago economist Diane Swonk of Mesirow Financial, one reason that Bernanke emphasized inflation is that he is a relatively new chairman and that he and other members of the central bank want to establish their credibility in controlling inflation.

Laurence Kotlikoff, an economics professor at Boston University, said Bernanke appeared to be "jawboning" companies, employees and financial markets to keep wages, prices and inflation expectations in line, or else the central bank might be forced to raise interest rates.

Carl Tannenbaum, an economist at LaSalle Bank in Chicago, said financial markets expected one interest-rate cut in 2007, and possibly two cuts. Now, with Bernanke's statement, there's a good chance interest rates will remain steady throughout next year, and possibly could be increased again, he said.

The economy slowed to a 1.6 percent annual growth rate in the third quarter, according to the first reading of the gross domestic product, the value of the nation's output of goods and services. Many analysts expect that a revision of that number, due today, will show only a small increase in growth from the original estimate.

Bernanke said he expected economic growth will be similarly slow in the fourth quarter, but he added, "Over the next year or so, the economy appears likely to expand at a moderate rate, close to or modestly below the economy's long-term sustainable pace." That appeared to indicate he expects an annual growth rate of 3 percent to 3.5 percent.

William Neikirk writes for the Chicago Tribune

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