Remarks raise odds of increase

Bernanke said the Fed will be on heightened alert against inflation dangers.

WASHINGTON (AP) — Ramping up his tough anti-inflation talk, Federal Reserve Chairman Ben Bernanke is raising expectations on Wall Street and elsewhere that the central bank could boost interest rates sooner than anticipated if high oil and food costs threaten to spur a broader bout of spiraling prices.

Over the past week, Bernanke has been sounding the alarm ever louder about the threat of inflation.

In his latest remarks Monday evening, Bernanke played down the May spike in the nation’s unemployment rate, saying the danger that the economy has fallen into a “substantial downturn” has faded.

At the same time, Bernanke sent a fresh warning that the Fed will be on heightened alert against inflation dangers, especially any signs that investors, consumers and businesses think prices will keep going up and change their behavior in ways that will aggravate inflation.

The Fed “will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation,” Bernanke said.

The Fed chief and his colleagues have been signaling that the Fed’s rate-cutting campaign, started in September, is probably over given mounting concerns about inflation. And, little by little, Bernanke is preparing people for the prospects of higher rates down the road.

For now, many analysts still expect the Fed to hold rates steady at 2 percent, a four-year low, when policymakers meet next on June 25. However, Bernanke’s remarks raise the odds that rates could go up later this year, instead of next year as many have been predicting, should inflation show signs of worsening, they said.

“I think the Fed wants to wait until the economic coast is clear to raise rates,” said Mark Zandi, chief economist at Moody’s Economy.com.

“But Bernanke is saying the Fed will sacrifice near-term economic growth to the altar of stable inflation” should prices start to take off.

Bernanke said a government report last week showing the unemployment rate rising from 5 percent in April to 5.5 percent in May — the biggest one-month jump in two decades — was “unwelcome.” However, the Fed chief said other forces should “provide some offset to the headwinds that still face the economy.”

The Fed’s powerful doses of interest rate cuts, along with the government’s $168 billion stimulus package, further progress in the repair of problems in financial and credit markets, a gradual ebbing of the drag from the deep housing slump, and still solid demand from abroad for U.S. exports should help the economy over the remainder of this year, he said.

“Inflation has remained high,” largely reflecting sharp increases in the prices of globally traded commodities, Bernanke said on Monday. “The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations.”

In the first four months of this year, consumer prices have risen at an annual rate of 3 percent. That’s down from a 4.1 percent rise — the biggest in 17 years — registered in 2007, but it’s still higher than the Fed is comfortable with.