By Scott Lanman and Steve Matthews
March 29 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke's words may be different, but the message is the same as the past seven months: He's more concerned about inflation than a slowing economy.
Bernanke told Congress yesterday that risks to economic growth have increased, especially because of the downturns in housing and company investment. The dangers aren't big enough to make the Fed dump its orientation toward combating prices, or ``inflation bias,'' he added.
The chairman clarified the Federal Open Market Committee's March 21 interest-rate statement, which led to conflicting interpretations by Wall Street economists. He rebuffed the notion that officials had shifted to a ``neutral'' stance and, in doing so, reduced speculation borrowing costs will be cut in coming months.
``At some point a Fed speaker, and it turned out to be the man himself, would come out and correct any misperception that the bias had been outright dropped,'' said Steven East, chief economist at investment bank Friedman Billings Ramsey Group Inc. in Arlington, Virginia. ``The bias is still toward tightening --a little softer, but still toward tightening.''
Some investors are still having a hard time digesting the idea that the Fed remains tilted toward raising rates.
Traders expect the Fed to cut its benchmark rate a quarter- point by August and again by year-end. The central bank has left the overnight lending rate between banks at 5.25 percent since August. Most of the 73 economists surveyed by Bloomberg News this month said the Fed will cut its rate to 5 percent or lower by December.
`Probably Misplaced'
``What we learned today was that hopes for a rate cut sooner are probably misplaced,'' East said.
The comments, Bernanke's first since the March 21 decision, and the most expansive remarks on that day's statement by any Fed member, underscored the Fed's dilemma.
While inflation has been at or above the top of the Fed chief's comfort zone for almost three years, any further rate increases may worsen the housing slump, given the sensitivity to changes in borrowing costs.
``The uncertainties have risen, and therefore a little more flexibility might be desirable,'' Bernanke said under questioning from Representative Jim Saxton of New Jersey, the ranking Republican on the Joint Economic Committee. ``Nevertheless, I do want to emphasize that we have not shifted away from an inflation bias.''
He said the Fed's outlook for ``moderate'' growth over coming quarters wasn't much changed by recent data, which indicated the housing market has yet to hit bottom and business spending continues to contract. Gains in employment and income are helping consumer spending support growth, he said.
Deeper Decline
Some economists retained their predictions of lower rates, calculating that a deeper slump in housing, spurred by rising delinquencies on the riskiest mortgages, will infect the overall economy.
``There will be bigger spillover from the housing market,'' said Paul Kasriel, director of economic research for Northern Trust Securities in Chicago and a former Fed economist. ``I don't believe their forecast. I think we are skating on thin ice.''
Economic reports this week backed Kasriel's pessimism. The Commerce Department said yesterday that durable-goods orders excluding transportation unexpectedly fell for a second month in February, triggering declines in Treasury yields and higher expectations for Fed rate reductions.
Dropped Language
The FOMC last week dropped a reference to the potential for ``additional firming'' in interest rates, language repeated since it ceased two years of increases in August. The shift suggested to some Fed watchers that policy makers were opening the door to lowering rates.
Bernanke stressed yesterday that ``inflation is above the levels most conducive to the achievement of sustainable growth and price stability.''
He told lawmakers that problems in the subprime market are ``likely to be contained,'' noting that mortgages for prime borrowers continue to ``perform well.'' More broadly, ``the drag from residential investment should wane'' as the stock of unsold new homes diminishes, he said.
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 earlier, according to reports this week. Delinquencies on subprime mortgages rose to a 3 1/2-year high of 13.3 percent last quarter, the Mortgage Bankers Association reported March 13.
Preferred Measure
The Fed's preferred inflation gauge, the personal consumption expenditures price index, minus food and energy, rose 2.3 percent in the 12 months to January. Bernanke and other Fed officials have said they are comfortable with the index rising at a 1 percent to 2 percent pace.
``Bernanke chose to emphasize that the Fed is still tilted toward higher interest rates, though the bias isn't as strong because of the uncertainties,'' said Tony Crescenzi, chief bond market strategist at broker Miller Tabak & Co. in New York. ``The best bet is for rates to be unchanged.''
To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Steve Matthews in Washington at smatthews@bloomberg.net .
Last Updated: March 29, 2007 00:07 EDT
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