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WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke on Wednesday said the U.S. economy was running so close to capacity that it faced heightened risks of an outbreak in inflation that could require higher interest rates to tame.
In his first extensive remarks since taking office two weeks ago, Bernanke appeared to be making an effort to establish credentials as an inflation "hawk" by stressing the need to keep price pressures contained.
"The risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately -- in the absence of countervailing monetary policy action -- to further upward pressure on inflation," Bernanke told the U.S. House of Representatives Financial Services Committee.
The remarks pushed prices for U.S. stocks and government bonds down and boosted the value of the dollar.
Presenting the Feds semiannual policy report to Congress, Bernanke said recent economic data, including booming January retail sales, "suggests that the economic expansion remains on track" after a strong 2005.
But he warned of inflation pressures, stemming in part from high energy prices.
"Another factor bearing on the inflation outlook is that the economy now appears to be operating at a relatively high level of resource utilization," Bernanke said, alluding to labor market conditions and the amount of industrial capacity in use.
He noted the Fed's policy-making Federal Open Market Committee, on the day before he took office, said it might need to boost U.S. interest rates further, "an assessment with which I concur."
The new Fed chief, who took over from Alan Greenspan on February 1, said the Fed had made "substantial progress" in bringing interest rates to a more-normal level after a string of rate rises dating to June 2004. The 14th move, on January 31, brought benchmark overnight rates to 4.5 percent.
"As a consequence, in coming quarters the FOMC will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data," Bernanke said.
While Bernanke underscored inflation risks, he also said high energy prices could act as a drag on the economy and the possibility of a slowdown in the U.S. housing market after a long boom bore close watching.
In his first extensive remarks since taking office two weeks ago, Bernanke appeared to be making an effort to establish credentials as an inflation "hawk" by stressing the need to keep price pressures contained.
"The risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately -- in the absence of countervailing monetary policy action -- to further upward pressure on inflation," Bernanke told the U.S. House of Representatives Financial Services Committee.
The remarks pushed prices for U.S. stocks and government bonds down and boosted the value of the dollar.
Presenting the Feds semiannual policy report to Congress, Bernanke said recent economic data, including booming January retail sales, "suggests that the economic expansion remains on track" after a strong 2005.
But he warned of inflation pressures, stemming in part from high energy prices.
"Another factor bearing on the inflation outlook is that the economy now appears to be operating at a relatively high level of resource utilization," Bernanke said, alluding to labor market conditions and the amount of industrial capacity in use.
He noted the Fed's policy-making Federal Open Market Committee, on the day before he took office, said it might need to boost U.S. interest rates further, "an assessment with which I concur."
The new Fed chief, who took over from Alan Greenspan on February 1, said the Fed had made "substantial progress" in bringing interest rates to a more-normal level after a string of rate rises dating to June 2004. The 14th move, on January 31, brought benchmark overnight rates to 4.5 percent.
"As a consequence, in coming quarters the FOMC will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data," Bernanke said.
While Bernanke underscored inflation risks, he also said high energy prices could act as a drag on the economy and the possibility of a slowdown in the U.S. housing market after a long boom bore close watching.
