By Craig Torres and Scott Lanman
March 28 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said monetary policy is still aimed at combating inflation even though risks to economic growth are multiplying.
``Our policy is still oriented towards control of inflation, which we consider to be at this time to be the greater risk,'' he told the Joint Economic Committee of Congress in Washington today. Still, ``uncertainties have risen, and therefore a little more flexibility might be desirable.''
His comments contained no reference to a possible interest rate cut, which some economists predict as soon as next quarter. Bernanke said the central bank last week dropped its stated tilt toward higher borrowing costs because policy makers wanted more room to maneuver. Policy makers want to move away from guidance on future rate decisions, he added.
``Neutral policy would be one where there is sense that the risks are weighted equally on both sides of the dual mandate, and therefore policy is essentially unpredictable and it depends on events as they come forward,'' Bernanke said. ``I do want to emphasize that we have not shifted away from an inflation bias.''
Bernanke was also chastised for the Fed's role in allowing too many subprime borrowers -- people with weak or sketchy credit histories -- to get mortgages they couldn't afford to repay. He told Committee Chairman Senator Charles Schumer, a New York Democrat, that the Fed ``needs more clarity'' about its ability to supervise the non-bank subsidiaries of bank holding companies. He added that ``it is worth looking at'' a federal predatory lending law.
First Since FOMC
The comments are his first on the economy since the Fed last week kept its benchmark rate at 5.25 percent. Reports this month showed a slide in new-home sales and consumer confidence, rising foreclosures and inflation that's still elevated.
``The economy appears likely to continue to expand at a moderate pace over coming quarters,'' he said earlier today in his prepared remarks to the Committee, dismissing concerns about a recession expressed by his predecessor Alan Greenspan.
Stocks fell and the dollar pared a decline against the yen. Hours before Bernanke spoke, a government report showed orders for durable goods excluding transportation unexpectedly fell for a second month.
Clarification
The Fed's statement last week puzzled investors because it abandoned an explicit preference for tighter credit at the same time that inflation was described as the ``predominant concern.'' Some economists read the language as opening the door to a rate cut and others clung to predictions of an increase.
``He was clarifying that inflation risks are still existent,'' said Jason Schenker, an economist at Wachovia Corp. in Charlotte, North Carolina. ``This is further reinforcement that the Fed is on hold for the rest of the year.'' He had previously predicted a reduction by June.
Fed officials forecast last month an expansion of 2.5 percent to 3 percent this year and 2.75 percent to 3 percent in 2008. Inflation, according to their outlook, will run at 2 percent to 2.25 percent this year, and 1.75 percent to 2 percent next year, minus food and energy. The unemployment rate will remain between 4.5 percent and 4.75 percent in both years.
Rising mortgage defaults and falling home prices have dimmed prospects for a quick recovery in housing. Foreclosures last month jumped 12 percent from a year ago and home values in 20 American metropolitan areas dropped 0.2 percent in January from a year ago, according to reports this week.
Foreclosures
A rise in foreclosures increases the possibility that builders and sellers will have to compete with an even bigger glut of properties on the market. The supply of unsold new homes at the current sales pace rose to the highest in 16 years as sales fell to the lowest level since 2000, the Commerce Department reported this week.
Stronger-than-forecast sales of previously owned homes and a rebound in residential construction last month may have been influenced by better weather, economists said.
Economists trimmed estimates for growth this year after corporate purchases of equipment and software declined at an annual rate of 3.2 percent last quarter, the most since the final three months of 2002, according to Commerce Department data.
The Fed's preferred inflation benchmark, the personal consumption expenditures price index, minus food and energy, has been at or above the two percent comfort zone of at least six Fed officials for 34 months. The price measure rose 2.3 percent for the twelve months ending January.
An index of 18 industrial materials tracked by the JOC-ECRI Index is up 2.5 percent year-to-date, and 12 percent over the past year. Oil prices are climbing.
Attacked in Congress
Congress has been critical of federal bank regulators in recent weeks for failing to curb lax lending standards during the biggest mortgage boom in American history. Last week, Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said the Fed failed to act on early signs of trouble.
Delinquencies on loans to subprime borrowers with limited or weak credit history rose to 13.3 percent in the fourth quarter, the highest since the third quarter of 2002.
Rising delinquency rates are occurring at a time of economic growth and a low unemployment rate of 4.5 percent, suggesting that poor underwriting standards caused the crisis.
To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net ; Scott Lanman in Washington at slanman@bloomberg.net .
Last Updated: March 28, 2007 16:26 EDT
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