Bernanke's Inflation Concerns Intensify

Fed's Geithner Calls for Stronger Financial Oversight

CHATHAM, Mass., June 9 -- Federal Reserve Chairman Ben S. Bernanke signaled deepening concern over inflation last night and said that the central bank will "strongly resist" any tendency for Americans' expectations of price increases to become unhinged.

Earlier in the day, New York Federal Reserve President Timothy F. Geithner called for stronger regulation of financial institutions, in the central bank's most extensive effort yet to propose changes that might prevent future financial crises like that of the past 10 months.

Their remarks reflect the challenges the Fed is facing as the economy and the financial system continue to struggle and the activist role the central bank is playing on multiple fronts.

Bernanke's comments were a response to events on Friday, when the price of oil and the nation's unemployment rate both soared. Using more forceful language about inflation than he did in a speech just a week earlier, Bernanke made clear that higher energy costs worried him most.

"The latest round of increases in energy prices has added to the upside risks to inflation and expectations," Bernanke said in a speech at a conference of the Boston Fed last night. Fed policymakers "will strongly resist an erosion of longer-term inflation expectations."

Those words do not mean the central bank will increase interest rates anytime soon. The Fed is likely to leave the short-term rate it controls unchanged when it meets late this month.

However, the language does suggest that Bernanke is more open to rate increases later this year, particularly if there are signs that higher prices for fuel are spreading to a broader range of goods.

Bernanke also addressed the higher jobless rate -- unemployment rose to 5.5 percent in May from 5 percent in April, the government said Friday. But he suggested that worsening economic conditions are roughly in line with what he was expecting as the Fed cut interest rates through the spring, and that the risk of a deep downturn has diminished.

"Despite the unwelcome rise in the unemployment rate that was reported last week," Bernanke said, "the recent incoming data, taken as a whole, have affected the outlook for economic activity and employment only modestly."

The Fed is charged by Congress with a "dual mandate" of trying to ensure low unemployment and price stability. For most of this year, the Fed has viewed slow growth as the foremost risk it was facing. Last night's speech -- coupled with comments from Bernanke last week expressing worry about the falling value of the dollar -- signaled that that balance of risks is shifting toward inflation.

Geithner, a key engineer of the Fed's response to the crisis, including the rescue of investment bank Bear Stearns in March, focused yesterday on the Fed's role in bringing balance to the financial system. Speaking before the Economic Club of New York, he proposed steps that might make the system less prone to disastrous breakdowns like those that transpired this year.

For example, he said that large financial institutions need to be required to hold more capital when times are good, to prevent them from facing a run on the bank when things are bad.