Fed now shifting focus to inflation

WASHINGTON - Federal Reserve Chairman Ben S. Bernanke signaled yesterday that the central bank's focus was shifting to controlling inflation instead of more interest-rate cuts.

High oil prices are a double-edged sword that can both put a damper on already weak growth and spread inflation, he said.

Bernanke, in remarks delivered via satellite to an international monetary conference in Spain, said the Fed's powerful doses of rate reductions that started in September along with the government's $168 billion stimulus package, including rebates for people and tax breaks for businesses, should bring about "somewhat better economic conditions" in the second half of this year.

To help brace the economy, the Fed in late April dropped its key rate to 2 percent, a nearly four-year low, but hinted that could be the last reduction for a while. Bernanke drove that point home again yesterday.

"For now, policy seems well-positioned to promote moderate growth and price stability over time," he said.

The Fed's juggling act has gotten harder. It is trying to right a wobbly economy without aggravating inflation.

Many economists say they believe the Fed will hold rates steady at its next meeting, June 24 and 25, and probably through much, if not all, of the rest of this year. A few say they believe that inflation could flare up and force the Fed to begin boosting rates near the end of this year.

Bernanke, however, suggested that leaving rates at their current levels should be sufficient to accomplish the Fed's twin goals of nurturing economic growth while preventing inflation from taking off.

Economic growth in the current quarter, he acknowledged, is "likely to be relatively weak." Even as he reiterated the Fed's hope for a pickup in growth in the second half of this year and into 2009, Bernanke said the economy continued to battle against a trio of negative forces - a housing slump, credit problems, and fragile financial markets.

Until the slumping housing market and falling home prices show "clearer signs of stabilization," there will continue to be threats to the economic growth getting back to full throttle, he said.

At the same time, if already lofty oil prices, now hovering above $127 a barrel, continue to rise, that could worsen inflation, Bernanke warned.

The Fed's aggressive rate-cutting campaign has contributed to a lower value of the U.S. dollar. That, in turn, has helped to push up the prices for imported goods flowing into the United States and fueled a rise in consumer prices. Bernanke called that development "unwelcome."

"The possibility that commodity prices will continue to rise is an important risk to the inflation forecast," he said.

During a question-and-answer session, Bernanke called the dollar's impact on the rise in commodity prices "relatively modest" and said global supply-and-demand conditions were more important factors driving up energy and other prices.