Bernanke: Fed Can Keep Rates Low

The U.S. economy has picked up to a decent pace of growth but with inflation so low, the central bank can afford to keep interest rates down, Federal Reserve Governor Ben Bernanke (search) said Monday.

In comments that reinforced the Fed's pledge not to hike rates quickly, Bernanke stressed that even with faster economic growth, a relatively high level of unemployment and unused factory capacity mean inflation is unlikely to become a problem.

"The Fed may not have to respond by tightening with the same speed as it has in past episodes precisely because inflation is low and is not as likely to respond so quickly ... as it has in past episodes," he told a conference in Washington sponsored by the National Association of Federal Credit Unions (search).

Bernanke did sound pleased with the recent spate of stronger-than-expected economic data, which has pushed forecasts for growth to at least 4 percent for the second half of the year.

Another senior Fed official, Atlanta Fed President Jack Guynn (search), said Monday he had turned more optimistic on prospects for the recovery in recent weeks.

"Although all sectors have not bounced back as fast or as strongly as we might have liked, the fundamental pieces of a more balanced expansion seem to be falling into place," said Guynn, who is a voting member on the Fed's policy committee.

Guynn did not discuss the outlook for inflation in his remarks to a civic club in Jacksonville, Florida.

The Federal Reserve has tried to reassure financial markets lately that even as the economy picks up speed, central bankers will not be in a rush to raise interest rates.

The key difference this time around, unlike in most post-war recoveries, is that inflation is low heading into the recovery.

Neither Fed speaker mentioned the weekend meetings of the Group of Seven (search), which raised concerns in financial markets that market interest rates will be pushed higher to compensate for a weaker U.S. dollar.

Bernanke and Guynn kicked off a busy week for Fed speakers following last week's policy meeting, when the central bank decided to leave the federal funds rate at a 45-year low of 1.0 percent.

In its statement, the Fed repeated its broad commitment to keep interest rates low for quite a long time, until the risk of inflation falling further has been eliminated.

Most economists believe official interest rates are on hold until at least the middle of next year. Some believe the Fed will not start raising interest rates until 2005.

Even though many are forecasting economic growth next year of around 4 percent or better, the unemployment rate is seen coming down only gradually from 6.1 percent in August.

Guynn acknowledged the economy appears to be still shedding jobs, despite signs of faster growth.

"The 'job-loss' recovery we've been in has been painful and frustrating for many, and the most recent data and anecdotal reports suggest it's likely not over yet," Guynn said.

Some private-sector economists are forecasting a gradual pick-up in inflation as the economy gathers pace.

But Bernanke, who has quickly emerged as the most closely watched Fed official after Chairman Alan Greenspan, said his forecast is that inflation will actually fall "a little bit further" even as the economy recovers.

"The basic idea that inflation will remain tame and under control is a good message to take away.

"But what I'd like to point out is that there are some risks to the downside there, because in particular, even though the economy is growing pretty rapidly, there's a lot of slack still in the economy," he said.

Fed Vice Chairman Roger Ferguson offered a note of caution on optimistic expectations for the global recovery. Ferguson, who also heads the Financial Stability Forum (search), a group of top global financial regulators, said in a statement that committee members thought current financial market valuations may be "overly optimistic."

"Questions remain about the sustainability and robustness of the global upturn," he said.

A speech by Federal Reserve Governor Mark Olson earlier Monday did not touch on the outlook for the economy.