Bernanke Shifts Focus to Inflation

Washington, DC, June 4, 2008--Federal Reserve Chairman Ben Bernanke said Tuesday he is worried about inflation and suggested that the Fed is done lowering interest rates.

Despite a shaky economy, Bernanke on Tuesday was somewhat optimistic the economy will improve in the second half of this year.

Bernanke noted that the slide in the U.S. dollar is contributing to inflation.

"Bernanke has inflation on the brain," said Richard Yamarone, an economist at Argus Research.

Many economists believe the Fed will hold rates steady at its next meeting on June 24-25 and possibly through the rest of the year.

The Fed's aggressive rate-cutting campaign has contributed to a lower value of the U.S. dollar. That, in turn, has contributed to increases in the price of imported goods and in consumer prices.

In the first four months of this year, consumer prices have risen at an annual rate of 3 percent, which is too high for the Fed's taste.

"Inflation has remained high," Bernanke said. "The possibility that commodity prices will continue to rise is an important risk to the inflation forecast," he said.

"Consumer spending has thus far held up a bit better than expected, but households continue to face significant headwinds, including falling house prices, a softer job market, tighter credit and higher energy prices," Bernanke said. Consumer spending is a major shaper of overall economic activity.

Businesses, too, are facing challenges, including rapidly escalating costs of raw materials and weaker demand from U.S. consumers, Bernanke said.

Observed Lynn Reaser, chief economist at Bank of America's Investment Strategies Group: "The Fed certainly does not want to see a repeat of the 1970s experience" of rising inflation combined with stagnant economic growth, a toxic mixed called "stagflation."