Washington – Wall Street gulped and stocks plunged Monday after Federal Reserve Chairman Ben Bernanke decried recent increases in inflation and pledged action if necessary to make sure surging energy prices don’t make things worse.
If the Federal Reserve follows through, that probably will mean higher interest rates, just when investors thought the Fed was about finished with its two-year rate-raising campaign.
For millions of Americans, rising borrowing costs would make it more expensive to buy a home or a car or to make other big-ticket purchases. It also would make payments more expensive on all the debt people have racked up – from credit cards to loans for education, vacations and other things.
The news stunned investors who had grown hopeful that the Fed was almost done with raising rates after recent data showed signs that the economy was beginning to cool. But with Bernanke reiterating that inflation still poses a problem, traders worried about higher interest rates in a slowing economy limiting the potential for stocks to make long-term gains.
Bernanke’s fresh inflation warning sent the Dow Jones industrials sliding 199.15 points to close at 11,048.72. The Dow is 5.1 percent below its six-year high of 11,642.98, reached May 10.
Broader stock indicators also slumped. The Standard & Poor’s 500 index dropped 22.93, or 1.78 percent, to 1,265.29; the Nasdaq composite index fell 49.79, or 2.24 percent, to 2,169.62, falling into negative territory for 2006.
Higher borrowing costs also will pinch Americans invested in stocks and bonds – be it through their 401(k)s, mutual funds or other investments.
“For the average American, their economic lives will become slightly less comfortable while interest rates rise,” said Mark Zandi, chief economist at Moody’s Economy.com.
Nationwide, inflation is still a big risk, even though the once- barreling economy is slowing, the Fed chief said.
In deciding the Federal Reserve’s next interest-rate move in late June, Bernanke said, he and other Fed policymakers will give the inflation outlook a very close look. They “will be vigilant” to ensure that the recent pattern of higher readings in core inflation – which excludes food and energy prices – is not sustained, he told an international monetary conference in Washington.
Bernanke offered his most extensive assessment of current economic conditions – he said the economy was “in a period of transition” – and the challenges facing Fed policymakers. Not once did he mention the possibility of the Fed taking a pause in its 2-year-old rate-raising campaign.
So far this year, inflation at the consumer level has been elevated in large part by rising energy prices, Bernanke said.
As measured by the Consumer Price Index, core inflation rose at an annual rate of 3.2 percent over the last three months and 2.8 percent over the past six months.
“These are unwelcome developments,” he said.
Fed policymakers pay close attention to core inflation figures to get a better sense of how prices of lots of other goods and services are behaving. As these core measures have marched higher, economists have worried that surging energy prices are feeding into higher price tags for more and more items.
Oil prices, which hit a record high of more than $75 a barrel, are hovering around $73 a barrel.
Gasoline prices have climbed, topping $3 a gallon in some areas.
To combat inflation, the Federal Reserve has boosted interest rates 16 times since June 2004. The Fed meets June 28-29.
