Fed chief warns of duel with inflation

WASHINGTON — Worried about high prices for energy, food and other things?

Ben Bernanke is, too.

The Federal Reserve chairman has moved inflation up on his list of worries, suggesting more pointedly than ever that the time for cutting interest rates is over in view of soaring oil and commodity prices and a weakened dollar.

Although the country's economic growth is still fragile — bruised by housing, credit and financial debacles — Bernanke on Tuesday expressed hope for some improvement in the second half of this year.

At the same time, he sounded a notably louder warning against inflation threats.

To this end, he raised his biggest public concern to date about the slide in the dollar, saying it has contributed to an "unwelcome rise" in inflation.

His fresh assessment — delivered via satellite to an international monetary conference in Spain — appeared to mark a subtle shift in Bernanke's views about economic risks.

Despite the rising concerns about inflation, Bernanke signaled the Fed is inclined to leave rates where they are. Boosting them could further weaken the economy's delicate state.

However, some analysts said Bernanke might be taking a baby step toward laying the foundation for a rise in rates — possibly later this year or early next year — if inflation were to flash signs of getting dangerously out of hand.

"Bernanke has inflation on the brain," said Richard Yamarone, an economist at Argus Research.

To help brace the economy, the Fed dropped rates in late April to 2 percent, a nearly four-year low, continuing a rate-cutting campaign that started last September.

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

Many economists believe the Fed will hold rates steady at its next meeting June 24-25 and probably through much, if not all, of this year.

However, some believe inflation could flare up and force the Fed to begin boosting rates later this year or next year.

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

The aggressive rate-cutting campaign has contributed to a lower value of the dollar. That, in turn, has contributed to increases in the price of imported goods and in consumer prices.

"We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations," Bernanke said, in a relatively rare public discussion of the dollar.

In the first four months of this year, consumer prices have risen at an annual rate of 3 percent. That's down from a 4.1 percent rise — the biggest in 17 years — registered in 2007, but it's still too high for the Fed's taste.

"Inflation has remained high," Bernanke said. "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.

Still, the "weaker dollar does have inflationary impact" and the Fed is attuned to that, he added.

The Fed is continuing to "carefully monitor developments in foreign-exchange markets," he said.

After Bernanke's remarks, the dollar — which has fallen sharply against the euro in the past year — gained some muscle. Short of raising rates, the Fed can try to talk up the dollar through tough anti-inflation rhetoric, analysts said.

Observed Lynn Reaser, chief economist at Bank of America's Investment Strategies Group: "The Fed certainly does not want to see a repeat of the 1970s experience" of rising inflation combined with stagnant economic growth, a toxic mixed called "stagflation."