WASHINGTON(Reuters) – Federal Reserve Chairman Ben Bernanke on Tuesday issued arare warning on the inflationary risk posed by a weak dollar, but saidU.S. interest rates were "well positioned" for an economy facing bothprice pressures and threats to growth.
"We are attentive to the implications of changes in the value of thedollar for inflation and inflation expectations," Bernanke said bysatellite to a conference on monetary policy in Barcelona, Spain.
He added that the Fed and the U.S. Treasury were continuing to "carefully monitor" currency market developments.
U.S. officials usually defer on any comment on the value of thedollar to the Treasury secretary, and analysts said Bernanke’s remarkswere highly unusual.
"It looks like there is behind-the-scenes concern over the dollarand its weakness. He is trying to give that a little bit of verbalsupport," Kim Rupert, managing director of global fixed income analysisat Action Economics LLC in San Francisco.
The dollar, which has declined steadily in value in recent yearsagainst other major currencies .DXY, rose broadly and Treasury debtprices dipped after Bernanke’s remarks. The cost of oil, which ispriced in dollars, fell.
Bernanke said the Fed’s interest-rate cutting campaign — which hastaken benchmark rates to 2 percent from 5.25 percent sincemid-September — and its infusion of billions of dollars into thefinancial system to ease a credit crunch have helped put a floor underthe economy.
"For now, policy seems well positioned to promote moderate growthand price stability over time," he said. "We will, of course, bewatching the evolving situation closely and are prepared to act asneeded to meet our dual mandate," he said.
Bernanke said until the U.S. housing market stabilizes the economywould continue to face the risk of further weakness. He cited oilprices, which have hit record highs in recent weeks, as another factorweighing on economic growth.
"Activity during the current quarter is likely to be relativelyweak," Bernanke said. "We may see somewhat better economic conditionsduring the second half of 2008."
However, the Fed chief also underscored concerns about inflationfrom the rising costs of oil and other commodities, although he saidthat so far they have had only a muted impact on broader prices.
"The pass-through of high raw materials costs to domestic laborcosts and the prices of most other products has been limited, in partbecause of softening domestic demand," he said. At the same time, hewarned that "the continuation of that pattern is not guaranteed andwill bear close attention."
Bernanke said that if commodity prices stabilized as futures marketspredict, there would be a "relatively rapid moderation of inflation,"but he said the possibility commodity costs continued to mountpresented an important risk to the outlook.
The speech did little to dissuade analysts from the view that theFed will leave interest rates unchanged at its next policy-settingmeeting on June 24-25.
"Bernanke is putting more attention on exchange rates and the dollarand trying to show the Fed’s concern about inflation. It clearly looksas if the Fed is going to hold policy steady for a while," said GaryThayer, a senior economist at Wachovia Securities in St. Louis.
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