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Fed chief hints higher rates

THE BALTIMORE SUN

WASHINGTON -- In his first public statements as chairman of the Federal Reserve Board, Ben S. Bernanke told Congress yesterday that interest rates may have to move higher to curb inflation and that he expects home prices to level off or dip slightly, rather than drop precipitously.

Testifying before the House Financial Services Committee, Bernanke said short-term interest rates are "still relatively low" and "some further firming of monetary policy may be necessary."

That left little doubt that the Fed's policymaking group, the Open Market Committee, would raise rates for a 15th consecutive time, to 4.75 percent, when it meets March 27 and 28.

Unlike his predecessor Alan Greenspan, who was famous for convoluted public testimony, Bernanke was clear, concise and brief. He erased any doubts that he, as a longtime academic, could handle the political hot seat. He answered tough questions with confidence, authority and an occasional gentle smile.

"I can see you are a former teacher; you are very clear in your responses," said Democratic Rep. Carolyn B. Maloney of New York. Bernanke was a professor of economics at Princeton University before his appointment as Fed chairman.

Bernanke pointed to inflation risks spelled out at the Jan. 31 meeting of the Open Market Committee, the last under veteran Chairman Alan Greenspan.

"Among those risks is the possibility that, to an extent greater than we now anticipate, higher energy prices may pass through into prices of non-energy goods and services and have a persistent effect on inflation expectations," Bernanke said.

Another inflationary factor, he said, is that the economy is now "operating at a relatively high level of resource utilization."

The new Fed boss predicted that the U.S. economy would remain strong through 2007. He expects the gross domestic product - the total value of the nation's goods and services - to grow 3.5 percent in 2006 and 3 percent to 3.5 percent in 2007, after adjusting for infla- tion.

He expects unemployment to remain low at about 4.75 percent to 5 percent over that period.

Bernanke also predicted inflation would grow about 2 percent this year and less next year, excluding volatile food and energy prices.

He was also reassuring about housing trends. Some economists worry that especially hot local markets could see home prices plummet once speculators cool to them.

Bernanke said that was unlikely. Although long-term mortgage rates are up half a point over last year's average, to about 6.25 percent, they remain relatively low. That, combined with post-hurricane rebuilding along the Gulf Coast, should continue to support the housing market, he said.

"Thus at this point, a leveling out or modest softening of housing activity seems more likely than a sharp contraction," Bernanke said.

Asked if he favors extending the 2001 and 2003 tax cuts, which President Bush backs but Democrats decry as fiscally irresponsible, Bernanke noted that they've contributed to the robust economy. But he also warned that federal spending grew along with the tax cuts, worsening the deficit, which imperils future prosperity.

Tax-cut supporters, he said, "have to accept also that in order for those tax rates to be sustained, ultimately they need to find savings on the spend- ing side to avoid further deficits."

Bernanke also said that he doesn't think the bond market is signaling a looming recession, as some analysts have suggested. Long-term rates for Treasury bonds are lower than short-term rates - a reversal of the norm known as an inverted-yield curve.

Such a trend has preceded the last four recessions, but Bernanke said the phenomenon's not as significant as it used to be. It's happening in other countries, too, he said, because expectations of low inflation predominate, making investors willing to accept low rates for long-term bonds.

Bernanke also said he opposed raising the minimum wage, an issue beyond his purview.

"I think it does lower employment," he said, contending that a boost might give suburban teenagers more money but wouldn't help the working poor. A better solution, he said, is expanding earned-income tax credits.

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