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

Bernanke: Jobs boost risks inflation

Raising key rate would disrupt recovery currently on the rise

Martin Crutsinger Associated Press

WASHINGTON – Federal Reserve Chairman Ben Bernanke said Wednesday that the Fed can’t take additional steps to try to ease high unemployment without escalating inflation.

If inflation were to accelerate, the Fed would have to raise rates to slow borrowing and spending and blunt price increases. Hiring might then slow.

Speaking to reporters, Bernanke became the first chairman in the Fed’s 98-year history to begin holding regular news conferences. The session, the first of three scheduled news conferences this year, is part of Bernanke’s long-standing campaign to make the Fed more transparent and to cast himself as open and accessible.

In fielding questions, he sketched a picture of an economy growing steadily but still weighed down by a prolonged period of unemployment, now at 8.8 percent. He acknowledged the pain that is causing, noting that around 45 percent of the unemployed have been without a job for six months or longer.

“We know the consequences of that can be very distressing because people who are out of work for a long time, their skills tend to atrophy,” Bernanke said.

But he added:

“It’s not clear that we can get substantial improvements in payrolls without some additional inflation risks, and in my view we can’t achieve a sustainable recovery without keeping inflation under control.”

Bernanke appeared relaxed with reporters, projecting a calming presence and saying nothing that might rattle investors.

The Fed chairman offered some clues about when and how the Fed would begin raising interest rates.

For more than two years, the Fed has kept a pledge to hold its key rate at a record low near zero for an “extended period.” At his news conference, Bernanke said that at this point, that phrase means “a couple of meetings.” The Fed, which ended a two-day meeting Wednesday, gathers about every six weeks.

Once the Fed abandons the “extended period” language, it would be viewed as a signal that it was preparing to start boosting interest rates.

Stocks rose after Bernanke said he expected the economy to continue growing through next year and 2013. The Dow Jones industrial average, which had been up about 50 points when Bernanke began speaking, closed up about 95 points.

Gold prices rose, indicating that investors expect the continuation of low interest rates to keep the dollar relatively weak. Treasury bonds, which are most sensitive to changes in Fed interest-rate policy, barely moved.

“We paid attention,” said David Ader, head of government bond strategy at CRT Capital. “But he didn’t say anything we hadn’t heard already.”

Bernanke acknowledged that higher gasoline prices are creating a financial hardship for many Americans. But he said the Fed doesn’t think gas prices will continue to rise at their recent pace.

The news conference offered Bernanke a chance to drive a debate about Fed policy. Critics have said the Fed’s efforts to boost growth raise the risk of high inflation.

Bernanke said the first step in tightening interest-rate policy could occur when the Fed stops reinvesting the proceeds of its bond holdings. Bernanke would not be specific about when that might occur. He said it will depend on inflation and economic growth in coming months.

He said that step would be a relatively modest one. But it would constitute the Fed’s first tightening because it would allow interest rates to creep up.