Fed’s top worry: Weak economy

Times Staff Writer

Prices may be rising unpleasantly fast, but what really worries the Federal Reserve is the weak economy, Fed Chairman Ben S. Bernanke said Friday.

Using careful language, the central bank chief said the Fed’s forecasts suggested that if energy costs and other commodity prices held their recent declines and the dollar stabilized, inflation would moderate by the end of this year.

Bernanke’s comments at a Fed conference in Jackson Hole, Wyo., were widely seen as a signal that the bank intended to keep its benchmark interest rate at 2%, a low level by historical standards, for much of this year and possibly into 2009.

The remarks, along with a more than $6-a-barrel drop in oil prices, fueled a rally in the stock market Friday. The Dow Jones industrial average surged 197.85 points, or 1.7%, to close at 11,628.06.


For months, Fed policymakers have been debating whether the economy’s paramount problem is inflation or economic weakness.

Inflation has been accelerating this year, driven by sharply rising prices of oil and other commodities, which set record highs in July. That month, consumer prices overall were up 5.6% from a year earlier, the highest rate of increase since 1991.

At the same time, growth has slowed so much that most economists believe that the economy is in a recession. U.S. payrolls have declined every month this year, pushing unemployment up to a four-year high of 5.7% in July.

The Fed has twin missions: to foster economic growth and to keep prices stable. The problem is that the medicine to treat slow growth -- low interest rates -- can fuel inflation.


The central bank’s “inflation hawks” contend that price increases are getting out of hand and should be fought with higher interest rates. Bernanke’s remarks make clear that the Fed’s concern about inflation remains secondary to its worries about growth.

The Fed chief cautioned, however, that the economy was volatile and the situation could change, especially if energy prices rebound.

“We will continue to monitor inflation and inflation expectations closely,” Bernanke said. “The [Fed] is committed to achieving medium-term price stability and will act as necessary to attain that objective.”

Ken Beauchemin, an economist at forecasting firm Global Insight, described Bernanke’s outlook as pretty much on target.


Overall consumer-price inflation “is going to come down in coming months pretty rapidly,” Beauchemin said.

Still, the dichotomy between growth and price stability is unlikely to go away soon, said economist Peter Kretzmer at Bank of America in New York.

“It is clear that this decision remains controversial within the [Fed] and is also a subject for ongoing discussion,” he said.