Bernanke: Energy Prices Could Speed Inflation
April 27, 2006 — -- Federal Reserve Chairman Ben Bernanke told Congress during testimony this morning that the economy is performing well and should continue on that track in the coming months, but rising energy prices and the resulting fear of inflation might force the Fed to continue raising interest rates.
"Rising energy prices pose risks to both economic activity and inflation," Bernanke said. "If energy prices stabilize this year, even at a high level, their adverse effects on both growth and inflation should diminish somewhat over time."
The chairman told members of a joint congressional committee that the nation's central bankers will be watching for signs that high gasoline and oil prices are being passed through to consumers in the form of price hikes on other products. Oil price spikes, like the recent two-week run-up to $75.17 a barrel, tend to force businesses to find a way to pass along their increasing costs, and any price increases could push inflation upward.
"If that were to happen and expectations for inflation were to rise, that would be very deleterious to the economy overall," said Bernanke during the question-and-answer period.
Wall Street was closely watching Bernanke's testimony for any hints about future interest rate hikes. The Fed has raised rates 15 times since June 2004 to keep inflation in check.
At the most recent meeting of the Fed's Open Market Committee, the governors crafted a statement that hinted that the "measured pace" of quarter-point rate hikes might be coming to an end. Stocks rallied on the news.
Today, however, Bernanke was a bit more reserved when talking about a pause in interest rate hikes.
"To support continued healthy growth of the economy, vigilance in regard to inflation is essential," he said.
Analysts are betting that the Fed will hike rates at its next meeting on May 10, but might pause for the first time in two years at its June meeting. Bernanke made an effort to dissuade people from believing a pause means an end to rate hikes overall.
"At some point in the future the committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook," Bernanke said. "Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings, and the committee will not hesitate to act when it determines that doing so is needed to foster the achievement of the Federal Reserve's mandated objectives."
In addition to keeping close tabs on energy-related inflation, Bernanke told the committee that the nation's housing boom seems to be slowing, but not at a dangerous pace.
"At this point, the available data on the housing market, together with ongoing support for housing demand from factors such as strong job creation and still-low mortgage rates, suggest that this sector will most likely experience a gradual cooling rather than a sharp slowdown," he said.
Recent data show that sales of new and existing homes actually picked up in March as steady or lower prices counteracted increasing mortgage rates.
Bernanke also took some time to focus on detrimental economic effects of the growing U.S. reliance on foreign debt and an aging work force. Both of these themes made regular appearances in Alan Greenspan's regular congressional testimony.
Both men say that Congress needs to act to reign in government spending and find ways to change Social Security and Medicare promises to make their costs reasonable as the baby boom generation begins to retire.
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