Bernanke: Inflation Remains Greater Concern than Risks to Growth

Fed Chair Ben Bernanke testified before the Congressional Joint Economic Committee yesterday that the Fed still maintains an "inflation bias" despite the growth of certain risks to the economy and will thus hold interest rates steady for the time being. Bernanke said that though his forecast for the economy remains substantially unchanged, weak capital spending and a slumping housing sector could cause growth to miss that forecast. Still, with inflation slowly ticking upward, rising prices continue to dictate the Fed's decision-making on interest rates. At last week's policy meeting, the Fed replaced the phrase "additional firming" -- which is usually interpreted to refer to interest rate hikes, and which has been in the Fed's policy statements since last June -- with the phrase "future policy adjustments," which is considered more neutral. Bernanke said the object was not to clue the markets in to pending interest rate cuts, but to give the Fed greater flexibility. The market signaled its disappointment by sending the DJIA down 96.93 points to close at 12,300.36. Bernanke also stated that the effect on the overall economy of the subprime meltdown "seems likely to be contained" and rejects former Fed Chair Alan Greenspan's warnings that a recession is on the horizon.

Sources: Wall Street Journal, Bloomberg, Time, MLive
Commentary: What Is the Fed Thinking? • Reading Between Federal Lines on the Economy • Fed Holds Rates, Eases Stance
Stocks/ETFs to watch: S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), iShares Lehman Aggregate Bond (AGG)
Related: Federal Reserve Monetary Policy

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