Surging energy prices are acting like a double whammy on the country's economy, crimping growth even as they push up inflation, Federal Reserve Chairman Ben Bernanke said Thursday.
“The increase in energy prices is clearly making the economy worse off both in terms of real activity and in terms of inflation. There is no question about it,” Bernanke told the House Financial Services Committee.
Although Fed policymakers at their June meeting were concerned about higher energy prices and the risk of inflation spreading through the economy, they also seemed hopeful that moderating economic activity could help ease inflation pressures down the road, according to minutes of that closed-door meeting released Thursday.
Oil prices, which set record closing high of $77.03 a barrel last Friday, have retreated and are now hovering above $73 a barrel. If oil prices were to rise an additional $10 or $15 a barrel, there would be "significant consequences" for the economy, the Fed chairman added.
The economy, which grew in the first quarter of this year at a 5.6 percent pace, the fastest in 2-1/2 years, is expected to slow to a pace of around 3 percent or less in the second half of the year, according to private economists' projections.
Lofty energy prices, a cooling housing market and less consumer appetite for spending are figuring prominently in the forecast for slower overall economic activity.
The rise in “core“ inflation, which excludes energy and food prices, “seems to be a broad-based phenomenon, so we don't think it is a statistical illusion,” Bernanke told the panel. Fed policymakers focus on the core measure to get a better sense of how other prices are acting.
For the first six months of this year, core prices rose at an annual rate of 3.2 percent — far outpacing the 2.2 percent rise for all of 2005.
Even though Fed policymakers at the June 28-29 meeting expressed concern about higher readings on core inflation, they thought the phenomenon was more likely to be temporary rather than persistent, the minutes said. “Inflation was seen by most participants as likely to edge down,” according to the minutes.
Striking a similar chord in an appearance Wednesday before the Senate Banking Committee, Bernanke raised hopes that a respite from two years of interest rate pain may be in sight, a notion that sent stocks soaring.
To fend off inflation, the Fed has boosted interest rates 17 times since June 2004, with the most recent increase coming at the June meeting.
“All eyes are on you ... as we reach a critical point in monetary policy,” Rep. Carolyn Maloney, D-N.Y., told Bernanke at the House hearing. After 17 rate hikes, “people are naturally wondering: When is it going to stop?”
Bernanke didn't say.
The Fed's next meeting is Aug. 8, and hopes are rising among investors that the Fed might take a break in credit-tightening campaign then to assess economic activity. Some economists believe another rate increase will come at the August meeting, but the Fed will move to the sidelines for a while after that.
“With the economy slowing and some of the effects of past tightening still in the pipeline, members recognized the value of accumulating more information for determining what, if any, additional policy action would be needed,” the Fed minutes said.
In other matters, Bernanke, at the House hearing:
- Observed that the once high-flying housing market appears to be experiencing a safe landing. “The downturn in the housing market so far appears to be orderly,” he said.
- Declared that the massive holdings of mortgage giants Fannie Mae and Freddie Mac “present a systemic risk” to the U.S. financial system. He previously has urged Congress to restrict their holdings.
- Expected U.S. workers' inflation-adjusted wages to rise in the coming quarters without necessarily causing an inflation problem. Last year, most workers' paychecks trailed inflation, putting a strain on some families budgets.
- Said he believed that market discipline — rather than new regulation — is the best way to police the activities of hedge funds.