Stocks Rise as Bernanke Hints That Fed May Pause Rate Increases

By Nell Henderson
Washington Post Staff Writer
Thursday, July 20, 2006

Federal Reserve Chairman Ben S. Bernanke said yesterday that the central bank remains worried about rising inflation, but he did not signal any immediate plan to raise interest rates again to combat it, sending stock prices soaring in relief.

Bernanke, testifying on Capitol Hill, did say the possibility of worsening inflation is the biggest threat to the U.S. economy, suggesting the Fed would combat that danger if necessary by raising interest rates in coming months.

But the Fed chairman also left open the possibility that the Fed may pause, at least briefly, after two years of steady interest-rate increases, taking no action at its next policymaking meeting, on Aug. 8.

"We will be evaluating all options when we come to meet in August," Bernanke told the Senate Banking Committee as he presented the Fed's economic forecasts for the next 18 months.

Markets rallied around the world. The Dow Jones industrial average jumped 212 points, or nearly 2 percent. Some analysts described the financial markets' reaction as a "relief rally" because Bernanke did not signal firm plans for another rate hike in August. Many traders had braced for a tougher warning after the Labor Department released a worrisome inflation report yesterday morning, before the chairman testified.

Stocks were also rebounding yesterday after dropping sharply late last week, when the escalating Middle East conflict pushed oil prices above $78 a barrel, fanning market fears of both higher inflation and slower economic growth, analysts said.

"The markets were looking for a reason to rally after several miserable trading sessions," said Richard Yamarone, director of research at Argus Research Corp. But, he added, "I think the markets got it all wrong . . . if they think the Fed is pretty much close to being done" raising interest rates.

Indeed, Bernanke stressed that Fed policymakers remain worried that consumer prices have risen more this year than expected, partly because of sharply rising prices for oil and other raw materials.

The Labor Department reported that its consumer price index moderated in June but is up 4.3 percent over the past 12 months -- a significant jump from 3.4 percent inflation in 2005.

More troubling to many economists was the fourth consecutive 0.3 percent monthly increase in the "core CPI," which excludes volatile food and energy prices and is seen as a measure of the ability of businesses to pass higher fuel and other costs to their customers.

Other measures of core inflation are up as well, Bernanke noted, adding that "the recent rise in inflation is of concern" to the Federal Open Market Committee, the central bank's top policymaking group.

The committee forecasts that its preferred measure of core inflation will rise this year and then slip a bit next year as the economy slows, according to the report Bernanke delivered to Congress. But that would leave inflation next year at 2 percent or higher, which is above the chairman's desired range.

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