Washington, DC, July 20, 2006--Rising oil and other prices remain a concern but Federal Reserve chief Ben Bernanke is counting on moderating economic activity to get inflation under control.
Bernanke appears on Capitol Hill for the second day in a row Thursday to provide the Fed's observations about the country's economic outlook. This time he'll speak to the House Financial Services Committee.
The assessment Bernanke delivered to the Senate Banking Committee on Wednesday raised hopes on Wall Street that a respite from two years of rate pain may be in sight. That propelled the Dow Jones industrial average up more than 200 points.
Although Bernanke waxed on about inflation risks, he also struck an encouraging note that the expectation of slower--but still healthy--economic growth will act as a force to blunt inflation pressures.
"Should that moderation occur as anticipated, it should help to limit inflation pressures over time," Bernanke told the senators as he delivered the Fed's twice-a-year economic report to Congress.
The economy, which grew in the first quarter at a 5.6 percent annual pace, the fastest spurt in 2 1/2 years, is expected to slow to a pace of around 3 percent or less in the second half of this year, private economists say.
A cooling in the housing market and a smaller spending appetite among consumers are main forces shaping the expected moderation in overall economic activity, Bernanke said. Business spending, however, is expected to remain solid, which should help underpin economic growth, he added.
Fed watchers had hoped that Bernanke, a respected economist and former economics professor with a reputation for speaking plainly, would put an end to the Delphic discourse that came out of the Fed under his predecessor, Alan Greenspan. However, Bernanke's communications with Wall Street and Main Street have been bumpy at times, particularly when he sent contradictory signals early on about where interest rates might be heading.
In Wednesday's testimony, Bernanke sought to strike a more balanced tone about the risk of inflation and other forces in the economy that could restrain prices from taking off.
The Fed has pushed up interest rates 17 times since June 2004 to fend off inflation. The Fed's next meeting is Aug. 8 and hopes are rising among investors and economists that the Fed might take a break in its rate-raising campaign at that time to assess economic activity.
Bernanke acknowledged to lawmakers that it's a difficult time for the Fed. If it pushes rates too high, it could cripple the economy. If it takes a breather too soon, inflation could strengthen its grip.
