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Bernanke Warns About Inflation

Federal Reserve Chairman Ben Bernanke said that risks from inflation or a worse-than-expected housing slump could further complicate things for an economy that is already slowing.

"The deceleration in economic activity currently under way appears to be taking
place roughly along the lines envisioned," Bernanke said in his most extensive
comments on the economy since the summer. The slowdown in overall activity
mostly reflects the housing slump, he said. As the economy cools, inflation also
should continue to gradually ease over the next year or so, the Fed chief added.

Yet, "substantial uncertainties" surround the Fed's outlook, Bernanke said in
prepared remarks to the National Italian American Foundation in New York.

The slowdown in the once sizzling housing market could turn out to be deeper
than expected, putting an even greater drag on overall economic activity. Or,
Bernanke surmised, economic growth could rebound more strongly than expected,
which could lead to a flare-up in inflation.

"A failure of inflation to moderate as expected would be especially
troublesome," he said.

U.S. Treasury debt prices fell and stocks trimmed gains as financial markets took the speech as a sign the Fed is not close to cutting interest rates as it remains focused on ensuring inflation pressures abate.

Overall inflation has showed signs of improving in recent months as once surging
energy prices have calmed down. However, "core" prices -- which exclude energy
and food and are closely watched by the Fed -- still remain "uncomfortably high,"
Bernanke said. Looking ahead, Bernanke said he expects those core prices to
moderate gradually over the next year or so.

But he made clear the Fed will be keep a close eye on the matter, especially on
labor costs, which can spark inflation if they grow rapidly.

Although the Federal Reserve has left interest rates alone since August,
Bernanke repeated the central bank's interest in keeping open the possibility of
a rate increase down the road, if such action would be needed to fend off
inflation.

"I think the bet of the financial markets, collectively, is that the Fed will leave rates unchanged at their December meeting, their January meeting and quite likely at their March meeting,” Hugh Johnson, chairman and chief investment officer at Johnson Illington Advisors, told CNBC's PowerLunch. "At a minimum, the markets are telling us the Fed will leave rates unchanged."

To thwart inflation, the Fed had hoisted interest rates 17 times since June
2004, its longest string of increases in its history. With the economy slowing,
the Fed has stayed on the sidelines since August. Many economists believe the
Fed will keep its finger on the interest rate pause button it meets next on Dec.
12, the last such session this year.

Bernanke's remarks followed a batch of mostly downbeat economic reports issued
Tuesday.

Orders placed to U.S. factories for manufactured goods plunged in October by the
largest amount in more than six years. The median price of an existing home sold
last month dropped by a record amount. And, consumer confidence in the economy
sank in November.

Economic growth during the July-to-September quarter slowed to a pace of just
1.6%, the most sluggish in more than three years. That mostly reflected
the housing slump. Investment in home building was cut by the largest amount in
15 years.

"The slowing pace of residential construction is likely to be a drag on economic
growth into next year," Bernanke predicted. Even though there are signs that the
demand for homes is stabilizing, builders still need to work off a bloated
inventory of unsold homes and that will take time and further adjustments, he
said.

The Fed chief added that even with the drag on the economy from the housing
slump and a struggling auto sector, the jobs climate is still fairly healthy.

The nation's unemployment rate sank to a five-year low of 4.4% in October
and workers' wages grew solidly. Those factors should help cushion the blows to
the economy from the housing slump, Bernanke said.