New US Fed chairman Bernanke hints at more interest rate hikes

16 February 2006

The newly appointed chairman of the US Federal Reserve Ben Bernanke said further hikes in interest rates may be required to contain inflation risk. In his first testimony to the US Congress after taking over as the Fed chief, Bernanke said that US economic growth remains on track.

'Although the outlook contains significant uncertainties, it is clear that substantial progress has been made in removing monetary policy accommodation. As a consequence, in coming quarters the Federal Open Market Committee (FOMC) will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data', Bernanke said on the monetary policy outlook.

On inflation, Bernanke said, "Maintaining expectations of low and stable inflation is an essential element in the Federal Reserve's effort to promote price stability. And, thus far, the news has been good: Survey measures of longer-term inflation expectations have responded only a little to the larger fluctuations in energy prices that we have experienced, and for the most part, they were low and stable last year.

"Another factor bearing on the inflation outlook is that the economy now appears to be operating at a relatively high level of resource utilization. Gauging the economy's sustainable potential is difficult, and the Federal Reserve will keep a close eye on all the relevant evidence and be flexible in making those judgments," he added.

On high oil prices Bernanke said, "the possibility of significant further increases in energy prices represents an additional risk to the economy; besides affecting inflation, such increases might also hurt consumer confidence and thereby reduce spending on non-energy goods and services."