WASHINGTON — Ben Bernanke’s juggling act has gotten harder.
The Federal Reserve chairman has been taking extraordinary steps to prevent credit, financial and housing problems from driving the country into a deep recession. At the same time, he faces the danger that the very tonic to brace the sickly economy could bring about another dangerous ailment — inflation.
And rare divisions have surfaced among Bernanke and his central-bank colleagues about just how aggressive the Fed should be in lowering interest rates to treat the wobbly economy.
Two of the Fed’s members — Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas — on Tuesday opposed cutting a key interest rate by three-quarters of a point, favoring a smaller reduction. It was a crack in the mostly unified front the Fed often shows the public. The last time there was a double dissent was in fall 2002 under Chairman Alan Greenspan.
The reasons for Plosser’s and Fisher’s dissenting votes weren’t laid out in the statement explaining the Fed’s action, although both men have a reputation for being especially vigilant about fighting inflation.
“Containing inflation is the purpose of the ship I crew for, and if a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient,” Fisher said in a speech earlier this month.
Although policymakers were hopeful that prices would moderate in the coming quarters, they acknowledged that “uncertainty about the inflation outlook has increased.” Rising inflation, fueled in large measure by soaring energy prices, complicates Bernanke’s job of trying to get the economy back on firm footing.
The Fed started cutting rates last September and turned much more forceful this year. Those lower rates can aggravate inflation at a time when people and businesses already are smarting from high energy and food prices. The Fed’s rate cuts also have weakened the dollar. That has raised the cost of imported goods and could lead U.S. companies to raise prices as foreign-made goods become pricier.
If treating inflation were the priority, the Fed would take the opposite action.
Fears have grown that the country could be headed for “stagflation,” a toxic mix of stagnant economic activity and rising inflation not seen in three decades.
“I don’t anticipate stagflation,” Bernanke told Congress last month. “I don’t think we’re anywhere near the situation that prevailed in the 1970s.”
Oil prices, which have galloped to record highs in recent weeks, are now hovering around $100 a barrel. Gasoline prices have marched upward and are expected to hit $4 a gallon nationwide this spring.
“I think the threat of inflation is as high as it’s been since the 1970s. Bernanke and the rest of them have a challenging task to navigate the economy away from recession and at the same time avoid inflation taking root,” said Sean Snaith, economics professor at the University of Central Florida. “If Bernanke can do this, he’ll look like a hero.”
