The Federal Reserve, which has signaled that it will soon increase interest rates, probably will do so in a series of small steps over many months or even a few years, one of the central bank's policymakers said yesterday.
A variety of forces, including small increases in interest rates, should keep inflation very low, "in the zone of price stability," for the rest of this year and into next year, Fed Governor Ben S. Bernanke said in a speech yesterday.
However, the pace and size of the increases could vary depending on the strength of the economic expansion, particularly the behavior of inflation and the labor market, he said at an event in Seattle, according to a text released in Washington.
Bernanke's remarks provided some guidance on what the Fed's top policymaking committee meant this month when it said its target for a key short-term rate, the federal funds rate, could be lifted "at a pace that is likely to be measured."
Analysts and investors interpreted that to mean that the Fed was preparing to raise the target, which has been 1 percent since last June. The strong April employment report and other recent economic indicators convinced many observers that the Fed will act at its next meeting, at the end of June, to raise the target by one-quarter percentage point, to 1.25 percent.
Economists remain divided over what they think the Fed will do after that meeting. Some predicted a few more small increases this year and others said the central bank is already behind the curve and will have to move more aggressively to rein in rising inflation.
"It appears likely that this normalization [of interest rates] can proceed gradually," Bernanke said yesterday, defining "gradualism" as adjusting rates "incrementally, in a series of small or moderate steps in the same direction."
As examples of "gradualism," he cited the four instances in the past 15 years when the Fed has raised or lowered its target, which influences many long-term rates determined by the markets. Lifting the target raises borrowing costs, curbing spending, and generally slows the economy's rate of growth. Lowering the target does the reverse.
In those four cases, the process of raising or lowering the target was accomplished in a series of small steps, usually a change of a quarter or half a percentage point, over periods that ranged from 11 months to more than three years.
Bernanke's remarks implied that financial markets should not worry about a rapid increase rates.
He warned, however, that the Fed would move more swiftly if necessary, particularly if inflation takes off in a sustained way.
The likelihood of a "measured" pace of change is based on the current economic forecast, he said, and is "not an unconditional commitment."
Bernanke cited several reasons why he expects inflation to remain comfortably low, including the recent increase in many long-term interest rates, such as those for mortgages and corporate bonds. Those rates, many of which are up by a percentage point or more from their recent lows in March, should start cooling household and business borrowing, slowing rapid economic growth.
Responding explicitly to critics who say the Fed is moving too slowly, Bernanke credited Fed communication efforts for feeding market expectations that the central bank is preparing to move soon, which caused market rates to start rising.
General interest rate conditions "have already begun to normalize, a development that should tend to limit future inflation risks," he said. "A significant portion of the financial adjustment associated with the tightening cycle may already be behind us."
Other factors likely to restrain inflation in the coming year include competitive pressures from globalization, high corporate profit margins, the recent strengthening of the dollar and the continued strong growth of productivity -- economic output per hour of labor -- which has kept a lid on labor costs.
Long-term inflation expectations appear "well contained," and the recent increases in the prices of many raw materials may be peaking, he said.
In this environment, he said, so-called core inflation, which excludes prices for food and energy, "appears likely to remain in the zone of price stability" into next year.
Bernanke has said his comfort zone for core inflation is 1 to 2 percent. Fed Chairman Alan Greenspan has defined price stability as inflation that is so low it is not a factor in economic decision-making by households or businesses.
While Bernanke emphasized that he was speaking for himself and not necessarily for his Fed colleagues, some of them have expressed similar expectations about inflation in recent public remarks.
Bernanke acknowledged that the "flare-up in inflation in the first quarter is a matter for concern, and that the inflation data bear close watching."
But he said he is confident that the Fed will adjust policy "as necessary to preserve price stability."