Washington – Federal Reserve Chairman Ben Bernanke isn’t blinking in his battle against rising prices even as tumult in financial markets threatens to slow growth.
Fed officials said higher inflation is “the predominant risk” when they kept their benchmark interest rate at 5.25 percent Tuesday.
They rebuffed calls for a more balanced assessment that may have presaged a rate cut. In doing so, they also broke with former Chairman Alan Greenspan, who elevated the role of financial-market stability in setting policy.
“They see the paramount task as keeping inflation low and keeping inflation expectations anchored,” said Brian Sack, a former adviser to senior Fed officials on policy strategy who is now an economist at Macroeconomic Advisers LLC in Washington.
Bernanke’s unwillingness to budge comes after price increases slowed for four straight months, to the lowest level since he took office. The Fed chief emphasizes the institution’s forecasts over coming quarters, while Greenspan tended to stress current conditions when markets weakened, enabling rapid shifts in policy.
U.S. stocks lost about $1.26 trillion in market capitalization since benchmark indexes reached records in July as banks restricted credit because of rising defaults on subprime mortgages. Volatility climbed to the highest level since April 2003 this week, according to the VIX index, a gauge tied to the Standard & Poor’s 500 index compiled by the Chicago Board Options Exchange.
“The signal from the Fed was unmistakable: Turbulent markets, in and of themselves, will not be sufficient to force their hand,” said Peter Kretzmer, senior economist at Banc of America Securities LLC in New York.
Unlike Greenspan, Bernanke isn’t going to provide short-term financing to help ease a slump in asset prices, said Joe Carson, director of research at Alliance Bernstein LP in New York. It’s too early to know if Bernanke’s strategy will be successful, he said.
“Wall Street is looking for an easy solution to these problems,” Carson said. “(Monetary) policy is not going to help out.”
At least 70 mortgage firms have halted operations, gone bankrupt or sought buyers since the start of 2006. Also, large banks are cutting back on their appetite for risky financings of corporate takeovers. At Bear Stearns Cos., two hedge funds failed in June and the firm’s chief financial officer said Friday that the fixed-income market is in its worst shape in 22 years.
