WASHINGTON – Federal Reserve Chairman Ben Bernanke said Tuesday that risks from inflation or a worse-than-expected housing slump could further complicate things for an economy suffering from a general slowdown.
"The deceleration in economic activity currently under way appears to be taking place roughly along the lines envisioned," Bernanke said in his most extensive comments on the economy since the summer. The slowdown in overall activity mostly reflects the housing slump, he said. As the economy cools, inflation also should continue to gradually ease over the next year or so, the Fed chief added.
Yet, "substantial uncertainties" surround the Fed's outlook, Bernanke said in prepared remarks to the National Italian American Foundation in New York.
The slowdown in the once sizzling housing market could turn out to be deeper than expected, putting an even greater drag on overall economic activity. Or, Bernanke surmised, economic growth could rebound more strongly than expected, which could lead to a flare-up in inflation.
"A failure of inflation to moderate as expected would be especially troublesome," he said.
Overall inflation has showed signs of improving in recent months as once surging energy prices have calmed down. However, "core" prices -- which exclude energy and food and are closely watched by the Fed -- still remain "uncomfortably high," Bernanke said. Looking ahead, Bernanke said he expects those core prices to moderate gradually over the next year or so.
But he made clear the Fed will be keep a close eye on the matter, especially on labor costs, which can spark inflation if they grow rapidly.
Although the Federal Reserve has left interest rates alone since August, Bernanke repeated the central bank's interest in keeping open the possibility of a rate increase down the road, if such action would be needed to fend off inflation.
To thwart inflation, the Fed had hoisted interest rates 17 times since June 2004, its longest string of increases in its history. With the economy slowing, the Fed has stayed on the sidelines since August. Many economists believe the Fed will keep its finger on the interest rate pause button it meets next on Dec. 12, the last such session this year.
Bernanke's remarks followed a batch of mostly downbeat economic reports issued Tuesday.
Orders placed to U.S. factories for manufactured goods plunged in October by the largest amount in more than six years. The median price of an existing home sold last month dropped by a record amount. And, consumer confidence in the economy sank in November.