WASHINGTON — Federal Reserve Chairman Ben S. Bernanke warned Tuesday that even though the housing and automobile sectors had dragged down economic growth, inflation remained "uncomfortably high."
The remarks were seen as suggesting that the Fed might not cut interest rates as soon as some investors hope. But many analysts still predicted that the Fed's next move on interest rates would be to lower them, although that might be six months away.
In a lunchtime speech to the National Italian American Foundation in New York, Bernanke declined to forecast whether the Fed would next raise interest rates to guard against inflation or lower them to add juice to economic growth.
"We will continue to monitor the inflation situation closely," Bernanke said. "Whether further policy action against inflation will be required depends on the incoming data."
Financial markets are betting that the Fed, after raising its benchmark short-term interest rate by a quarter-point at all 17 meetings from mid-2004 to mid-2006, will continue its current policy of standing pat through next spring and then cut.
Some analysts interpreted Bernanke's hawkish remarks as a nod toward the Fed's primary job of fighting inflation. Ian Shepherdson, chief U.S. economist for High Frequency Economics, said the Fed would maintain the stance that Bernanke outlined Tuesday until the economic slowdown was unmistakable. Only then, he said, would the Fed countenance a rate cut.
Economists at Goldman Sachs told their clients that the economy would get weaker before it got stronger. But the process will be gradual, they said, and the Fed will not cut rates until May.
Gary Wolfer, chief economist of Univest National Bank & Trust of Souderton, Pa., also saw a rate cut in May.
Economic growth will improve at the end of this year, he said, but then it will turn back down, and the Fed will have no choice but to respond.
Economic growth has slowed considerably this year, from an annual rate of 5.6% in the first quarter to 2.6% in the second three months and 1.6% in the third. Bernanke blamed housing and automobiles.
"Outside of the housing and motor vehicle sectors," he said, "economic activity has, on balance, been expanding at a solid pace." He singled out commercial construction for growing smartly and offsetting some of the slump in residential construction.
He was also bullish on productivity, even though its growth has slowed from an average of about 3% a year in the first half of this decade to essentially zero in the third quarter of this year.
Inflation was the major concern on Bernanke's radar screen. Excluding the volatile food and energy sectors, the so-called core consumer price index has risen 2.7% in the most recent 12 months, up from 2.1% the previous 12 months.
He said the Fed was paying particular attention to wage inflation because labor costs, after being long dormant, "have been rising more quickly of late." He warned of the possibility that employers would pass along their higher wages by charging higher prices, thus triggering a wage-price spiral.
Bernanke did not address the dollar, which has been losing value to the euro and the Japanese yen. A cut in U.S. interest rates would probably aggravate that trend.