Federal Reserve Chairman Ben Bernanke is hopeful inflation will moderate later this year.AP photo
JACKSON, Wyo. — Federal Reserve Chairman Ben Bernanke said Friday the financial crisis that has pounded the country — coupled with higher inflation — is taking a toll on the economy and poses a major challenge to Fed policymakers as they try to restore stability.
“Although we have seen improved functioning in some markets, the financial storm that reached gale force” around this time last year “has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment,” Bernanke said in a speech to a high-profile economics conference here.
While Bernanke welcomed the recent drops in oil and other commodities’ prices, and believes inflation will moderate this year and next, the Fed chief also warned the inflation outlook remains highly uncertain.
The Fed, he said, would monitor the situation closely and will “act as necessary” to make sure that inflation doesn’t get out of hand. The current financial and economic environment is one of the most challenging to Fed policymakers “in memory,” he acknowledged.
Given those dueling economic cross-currents— weak economic growth and higher inflation — many economists believe the Fed will leave rates where they are at its meeting on Sept. 16, and probably through the rest of this year.
“They won’t act until the coast is clear on financial stability and the state of the economy,” said Allen Sinai, chief global economist at Decision Economics Inc. Many fear the economy will hit a rough patch later this year as the bracing effect of the government’s tax-rebate checks fades.
The economy is the top concern for voters and of keen interest to presidential contenders Sens. Barack Obama and John McCain, who are gearing up for their party’s conventions. Financial and credit problems are expected to smolder into next year. And, the unemployment rate, which jumped to a four-year high of 5.7 percent in July, is expected to keep rising.
The bulk of Bernanke’s speech dealt with the need to bolster oversight of the nation’s financial system to make it better able to withstand future shocks.
To that end, Bernanke recommended that regulators work on ways to assess the health of the entire financial system, rather than the condition of individual banks, Wall Street investment firms or other financial companies — as is currently the focus.
“Such an approach would appear well justified as our financial system has become less bank centered,” he said. “Some caution is in order, however, as this more comprehensive approach would be technically demanding and possibly very costly both for the regulators and the firms they supervise.” He added that “stress tests” for a range of financial firms might also be helpful.
Bernanke repeated his call for Congress to provide new regulatory powers to insulate the economy from damage if a Wall Street firm collapses. He again urged lawmakers to give the central bank explicit authority to oversee systems that process payments and other financial transactions by investment firms and banks.
The Fed’s handling of the credit, financial and housing debacles is spurring debate at this year’s forum, which draws Fed policymakers, economists, academics and international central bank officials.
Charles Calomiris, professor at Columbia University’s Graduate School of Business, believes the Fed should be more focused on inflation fighting: “The Fed needs to raise (interest rates) now, slowly and predictably to restore confidence in its continued commitment to price stability.”
FED SPEAK: Fed Chairman Ben Bernanke said the current economic environment is among the most challenging to Fed policymakers “in memory.”
INFLATION: Bernanke said inflation should moderate later this year and next, but added that the outlook for higher prices remains highly uncertain.