Bernanke expects inflation to moderate

JACKSON HOLE, Wyo. – Speaking at the annual Federal Reserve conference held in this Rocky Mountain resort town, Fed Chairman Ben S. Bernanke said that he expected inflation to ease later this year and into 2009, but that the central bank would act if that turned out not to be the case over the “medium term.”
Bernanke said that the bank’s benchmark interest rate is low relative to the current price pressures, according to Bloomberg News, but that growth in unemployment, stalling economic growth and turmoil in the financial sector of the economy were all factors that needed to be watched. In addition, he indicated that government officials must consider overhauling regulation of the financial sector in order to cut the risk of future financial crises.
The Fed chief again defended the bank’s role in keeping Bear Stearns Cos. from collapsing, saying that “the economy could hardly have remained immune from such severe financial disruptions.” But he is receiving second guessing from former central bankers for his bold actions in recent months.
“Where can the limits be drawn?” asked Paul Volcker, the Fed chairman from 1979 until 1987. Volcker and others are worried that the Bear Stearns bailout will encourage excessive risk taking and lead to larger rescues down the road.
“They are in a lot of new lines of business now in terms of lending to entities they didn’t use to, in terms of taking credit risk that central banks don’t usually have,” Vincent Reinhart, a resident scholar at the American Enterprise Institute and former director of the Board’s Division of Monetary Affairs said before the speech. “The Federal Reserve is over-extended.”