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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Bernanke tells market what it feared most

Associated Press The Spokesman-Review

NEW YORK — An already slumping U.S. stock market heard Monday what it least wanted to hear: the Federal Reserve has not finished raising interest rates.

Fed Chairman Ben S. Bernanke didn’t state it as boldly as that, of course. He’s a relatively direct speaker, not a revolutionary. And it would take a revolution for a flat-out predictions from a Fed chieftain about future rate policy.

But Bernanke came close enough to confirm what stock investors must already know but don’t want to know. There’s enough concern about inflation for the Fed to keep tightening policy. That most likely means weaker U.S. economic growth and slower growth in corporate profits. That provides little incentive for stock indexes hobbled in May to regain their stride.

The Fed really has no choice. In the central bank playbook authored by Paul Volcker and Alan Greenspan and revered through the land, inflation must not be allowed to rise enough to embed itself into the economic system and the nation’s psyche.

Volcker, when he led the Fed, raised rates enough to assure recession. Bernanke doesn’t have nearly that stark a choice. True, as he noted in remarks Monday, the economy’s growth already is moderating. Further increases in the Fed-controlled federal funds rate above the current 5 percent will push it further in that direction.

But Bernanke spent some time in prepared remarks to note how business spending this year has at last perked up, and how it might lighten the growth burden for so long carried by consumer spending and rising housing prices.

“Spending on equipment and software is also on a strong upward trend, and backlogs of orders for capital goods are still rising,” Bernanke said. “Business investment is being supported by high rates of profitability and capacity utilization.” He also cited a pickup in investment in nonresidential structures.

Still, in a financial world that keeps daring the new chairman to prove his inflation-fighting mettle like Greenspan and Volcker before him, Bernanke did not mince words.

“These are unwelcome developments,” he understated about inflation data of the past quarter and half-year. Figures show price increases “above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-term growth.”

And to those who worry the Fed will go too far in an inflation fight and kill off all growth, Bernanke said it’s all or nothing.

“There is strong consensus among the members of the Federal Open Market Committee that maintaining low and stable inflation is essential for achieving both parts of the dual mandate assigned to the Federal Reserve by the Congress,” he intoned.

Later he added: “Therefore, the Committee will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained.”

Without low inflation and contained expectations about future inflation you have nothing: no growth, no maximum, sustainable employment. Nothing.

Given the mixed bag of economic data and the Fed’s droning on about its future decisions being data dependent, many expected a roller-coaster ride of expectations between now and the end of June, when the Fed next meets to set rates.

As a bone to the inflation doves and acknowledgment of slower growth already in gear, the late June rate increase will be limited to the quarter-point that’s been the hallmark of the long march upwards from 1 percent.

The data dependency has moved to later in the year. And the numbers that matter most will be those that herald inflation and the anticipation of more, not growth data.