Fed chairman upbeat about the economy

Bernanke tells Congress inflation could still be issue

by Jeannine Aversa

Associated Press writer

WASHINGTON – Federal Reserve Chairman Ben Bernanke told Congress Wednesday the economy should grow modestly this year and the inflation should continue to wane, reasons enough for the central bank to keep interest rates steady for the time being.

Still, Bernanke wasn’t prepared to declare victory over inflation just yet and thus didn’t close the door on the possibility of further interest rate increases down the road. Even with recent improvements in “core” or underlying inflation, the situation remains “somewhat elevated,” he said.

Delivering the Fed’s first economic report for 2007 to Capitol Hill, Bernanke offered a mostly unbeat assessment of the economy’s outlook. Besides improvements on the inflation front, the Fed chief also cited some signs of stabilization in the ailing housing market.

“Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes,” the Fed chief told the Senate Banking Committee.

Currently, interest rates are at a level that is “likely to foster sustainable economic growth and a gradual ebbing of core inflation,” he added.

The Fed has held a key interest rate steady at 5.25 percent since August. Before that, the central bank had steadily boosted rates for two years, the longest stretch of increases ever, to fend off inflation.

Many economists predict the Fed will leave rates alone for much of this year and said the Fed chief’s testimony would support that approach.

Hedging his bets

Even with his mostly positive assessment, Bernanke was careful to hedge his bets and pointed out risks that could upset the generally good economic outlook.

A predominant one is that inflation might flare up, which is why the Fed is still keeping open the option of another rate increase.

It will “be some time before we can be confident that underlying inflation is moderating as anticipated,” Bernanke said. If inflation doesn’t wane as the Fed expects, policymakers are “prepared to take action,” Bernanke said.

On the other hand, there is the risk that a deeper than expected residential real-estate bust could yet unfold, which could hurt overall economic growth, the Fed chairman said.

If that were to happen, the Fed in theory might be inclined to lower rates to help bolster the economy.

Bernanke, however, did not specifically mention the possibility of a rate cut.

A former college professor, Bernanke marked his first anniversary at the Fed on Feb. 1. President Bush tapped him to succeed longtime Chairman Alan Greenspan, who rose to iconic status in his 18-plus years at the helm of the Fed.

Bernanke said that bolstering education and helping workers acquire new skills should help the situation.

On trade, Bernanke said he is not happy with the United States’ record-high deficits but suggested erecting protectionist barriers would do more harm than good.

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