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Wednesday, July 19, 2006

When to Hit the Pause Button?

The Wall Street Journal has a summary of Ben Bernanke's written remarks from his testimony before the Senate Banking Committee. The message is the same, growth is moderating but inflation remains a concern:

Link to video of hearing (CSPAN - expires in 15 days).

Bernanke Sees Inflation Pressures Declining as Growth Moderates, by Brian Blackstone and Campion Walsh, WSJ: Federal Reserve Chairman Ben Bernanke said Wednesday a moderation in U.S. growth "now seems to be under way," which "should help to limit inflation pressures over time."

While noting that some of the recent rise in underlying inflation is due to technical factors and that inflation expectations "remain contained," inflation remains "of concern" to policy makers, Mr. Bernanke said in semiannual monetary policy testimony prepared for delivery to the Senate Banking Committee. ...

Also, CPI figures were released today and core inflation was up a bit more than anticipated adding to inflation worries:

Earlier Wednesday, the Labor Department reported that the June consumer price index increased 0.2%. Excluding food and energy, consumer prices advanced 0.3%, the fourth-straight rise of that size. Fed chairmen receive major economic reports, including consumer prices, the evening before they're released to the public. ...

The Wall Street Journal also reports market reactions:

Markets reacted immediately to the numbers. Stock futures gave up early gains, on the expectation the Fed will be more likely to raise interest rates again in August. The federal-funds futures contract at the Chicago Board of Trade, where traders bet on future Fed policy, priced in a 90% chance of a quarter-point August increase, compared with 68% before the consumer-price release....

Those of us who would like to see the Fed take a breather in its rate hike campaign to avoid overshooting aren't getting a lot of help from the inflation reports.

Update: The markets have changed their mind after hearing Bernanke's comments:

After struggling amid concerns about the Mideast conflict and rising oil prices, stocks surged Wednesday after Federal Reserve Chairman Ben Bernanke indicated in Congressional testimony that the central bank may stop raising interest rates soon.

The comments, delivered before the Senate Banking Committee, reversed earlier concerns about further rate increases inspired by a report that showed a measure of retail price inflation is rising at a faster pace than expected.

I'll update this later when summaries of Bernanke's remarks in response to questions are available.

Note: If you don't have a WSJ subscription, here are links to Bloomberg reports:

Update: Tim Duy is working an a new Fed Watch for tomorrow, so I will let him put the remarks into perspective. For now, here's Greg Ip and Mark Whitehouse of the WSJ with a summary of Bernanke's remarks:

Bernanke Sees Inflation Pressures Declining as Growth Moderates, by Greg Ip and Mark Whitehouse: Federal Reserve Chairman Ben Bernanke called rising inflation a "concern" but predicted an economic slowdown would reverse that rise. Markets took those words to mean that, for now, the Fed will worry more about slowing growth and stop raising interest rates soon. Bond yields fell and the Dow Jones Industrial Average soared Wednesday.

Mr. Bernanke spoke the same day as the government reported inflation rose and home construction fell last month, underlining the opposing risks confronting the central bank.

"The recent rise in inflation is of concern," Mr. Bernanke told the Senate Banking Committee. "Possible increases in [energy] and other commodity prices remain a risk to the inflation outlook."

But Fed policy makers "project that growth … should moderate" to its long-term potential rate "both this year and next. Should that moderation occur as anticipated, it should help to limit inflation pressures over time."

Part of Mr. Bernanke's job Wednesday was to blunt accusations of sending inconsistent messages since taking the post on Feb. 1. ... Wednesday, he appeared to seek ... balance by acknowledging that inflation was too high but laying out a forecast of slowing growth and stable energy prices that would allow inflation to fall back. And, in an important break from the past few years, he gave no explicit signal about how the Fed would move interest rates to achieve that forecast, forcing markets to decide for themselves...

Update: See David Altig at macroblog for an analysis of today's price report.

    Posted by on Wednesday, July 19, 2006 at 08:39 AM in Economics, Fed Speeches, Monetary Policy, Video | Permalink  TrackBack (0)  Comments (15)

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