Washington – Gentle Ben, he won’t be.
Ben Bernanke, appearing before Congress this week for the first time since becoming Federal Reserve chairman Feb. 1, is likely to brush aside lawmakers’ calls for a pause in the central bank’s credit-tightening campaign and vow vigilance against inflation, analysts say.
Cementing the Fed’s inflation-fighting credibility at a time of regime change at the central bank is particularly important because some in the markets are already suspicious that Bernanke will be soft on inflation. Behind those concerns: Bernanke’s suggestion in 2002 that the Fed would pull out all stops if needed to fight a deflationary downturn in the economy, a strategy he compared to a “helicopter drop” of money.
“He’s given his helicopter speech and established his anti-deflation credentials,” said Tom Gallagher, Washington-based senior managing director at ISI Group, a New York money-management and research firm. “Now he’s got to give his howitzer speech and establish his anti-inflation credibility.”
There’s a lot at stake. If investors fear that Bernanke, 52, won’t keep inflation in check, they’ll sell bonds, driving long-term interest rates higher. The dollar also could suffer as foreigners cut back on their purchases of U.S. currency.
“If the dollar starts to deteriorate, it could easily turn into a new-chairman jitters story,” said Louis Crandall, chief economist at Wrightson ICAP, an economic-research company in New York. “He’ll want to avoid that.”
With the economy gathering momentum, inflation expectations have already heightened. The gap between yields on 10-year Treasury bills and inflation-linked government debt with similar maturities widened 0.2 percentage point in January, the most in 20 months, to 2.53 percentage points. The gap was about 2.5 percent Friday.
Inside the Fed, officials have begun to debate whether the unemployment rate has fallen too far, running the risk of stepped- up wage demands by workers and ultimately faster inflation. At 4.7 percent in January, the jobless rate has fallen to a level that many Fed economists consider the equivalent of full employment.
