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Fed Chairman Forecasts Slowdown in U.S. Economy
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VIDEO | Bernanke: US Economy Likely to Slow
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Bernanke acknowledged another set of risks with unusually specific language.
The rising price of oil and other commodities, and the simultaneous fall in the dollar, could ripple through the economy and create higher prices for a broader range of products. Such inflation would tie the Fed's hands if the economy weakens because if it cuts interest rates further, it could spur more inflation.
Bernanke said the higher oil prices and weaker dollar "were likely to increase overall inflation in the short run, and, should inflation expectations become unmoored, had the potential to boost inflation in the longer run as well."
By using tough, unambiguous words about the threat of inflation, Bernanke appeared to be signaling to financial markets not to count on more rate cuts anytime soon.
"He is trying to buy himself some flexibility," said John Silvia, chief economist at Wachovia. There was a widespread perception that investors, by counting on a rate cut last week, made the Fed more inclined than it would have been to grant it. "He doesn't want Wall Street forcing his hand again," said Silvia.
If that was Bernanke's plan, it didn't seem to work. After his pessimistic outlook for the economy, prices in futures markets yesterday indicated that investors' expectations rose for rate cuts at future meetings.
As Bernanke explained his expectation that the housing market would cease to be a drag on the overall economy by the middle of 2008, Sen. John E. Sununu (R-N.H.) noted that in March, he and Bernanke had disagreed on the housing outlook. Sununu recalled that he had expected housing inventories to rise more than the Fed chairman did.
"Well, Senator, you were right and I was wrong," Bernanke said yesterday. "Again, our anticipation . . . is that those inventories are not going to go much further from here. But, you know, in six months, you can tell me that I was wrong again."
