Federal Reserve Chairman Ben S. Bernanke on Wednesday said that while rising public expectations for inflation are a “significant concern,” there’s little sign of the pressures that drove price increases above 10 percent in the 1970s.
“Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern” for the Fed, Bernanke said yesterday in a speech during a Class Day ceremony at Harvard University, adding that policymakers “need to monitor that situation closely.”
Signs of increasing prices compelled Bernanke and other Fed policymakers to signal in April they'll pause after reducing the benchmark interest rate by 3.25 percentage points since September. The Fed is trying to sustain economic growth and minimize harm from the collapse of the subprime mortgage market without impairing its credibility on inflation.
Bernanke’s remarks focused on the differences between the U.S. economy now and in the 1970s. The combination of a housing slump and slow growth along with surging food and energy costs has prompted economists to resurrect the term “stagflation,” first used in the 1960s to describe a mix of slow growth and rising prices.
“The Fed's dilemma is obvious and there's a lot at stake,” said Mickey Levy, chief economist at Bank of America Corp. in New York. “To be consistent with its long-run inflation objectives, the Fed must eventually raise” the real funds rate to at least 2 percent, he said.
Bernanke didn't comment on the outlook for monetary policy in his remarks. Traders anticipate the central bank will keep its benchmark rate at 2 percent at the next meeting on June 24-25, futures prices show.
“Maintaining confidence in the Fed's commitment to price stability remains a top priority,” Bernanke said. “We see little indication today of the beginnings of a 1970s-style wage-price spiral.”
The consumer price index rose 3.9 percent for the year ending April 30, and expectations of inflation five years from now rose to 3.4 percent in May versus 3 percent in January, according to a Reuters/University of Michigan Survey.
“The overall inflation rate has averaged about 3.5 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s,” Bernanke said.
Compared with the 1970s, monetary policy today is committed to price stability, the economy is less energy dependent and is more flexible, he said.
“The silver lining of high energy prices is that they provide a powerful incentive for action” promoting conservation and investment in energy-saving technologies, Bernanke said.