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Raise Taxes on Gasoline!

Ben Bernanke Reports to Congress for the First Time

Andrew Balls on what Ben Bernanke meant: / World / US - Fed chief hints at further rate rises : By Andrew Balls in Washington Published: February 15 2006 15:46 | Last updated: February 15 2006 23:30: Ben Bernanke, Federal Reserve chairman, said on Wednesday that interest rates might have to rise to prevent the US economy overheating but inflation remains moderate.

Mr Bernanke, giving evidence before Congress for the first time since taking over from Alan Greenspan, made an assured debut.

He told the House financial services committee: “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.”

“In these circumstances, the FOMC judged that some further firming of monetary policy may be necessary, an assessment with which I concur.”

While energy prices had increased inflation pressure and headline inflation numbers, Mr Bernanke characterised last year’s 1.9 per cent rise in the Fed’s preferred inflation measure – the core personal consumption expenditures index excluding food and energy – as “moderate”.

Recent data have supported the Fed’s view that the economy snapped back after a weak fourth quarter. With little spare capacity in the economy, the central bank wants to see growth slow to the economy’s trend rate.

Bond prices were little changed after the testimony before the House financial services committee, and the dollar rose slightly. Investors expect the Fed to raise the federal funds rate a quarter point to 4.75 per cent at the end of March, and see a good chance of another rate increase in May.

“Overall, it came across as pretty balanced, with the lean towards more tightening but the signal that they problably don’t have a lot more to do,” said Peter Hooper, chief US economist at Deutsche Bank.

While stressing the many uncertainties in the outloook, Mr Bernanke endorsed the consensus forecasts of the FOMC members, collated last month before he joined the Fed, which expect core inflation at about 2 per cent this year and at 1.75-2 per cent in 2007.

Since monetary policy would be expected to influence inflation in the second year, this can be seen as an implicit objective as well as a projection.

That is the top of the 1-2 range that Mr Bernanke popularised as the FOMC’s comfort zone during his three years as a Fed governor before he joined the White House last year...