Bernanke 'uncomfortable' about inflation

US Federal Reserve Chairman Ben Bernanke injected some doubts into hopes that the US Federal Reserve may cut interest rates in the near future by warning inflation was still a problem.

Last week the US Federal Reserve was credited with fuelling a rally in global stockmarkets by dropping their bias to tighten rates further and market participants interpreted the accompanying statement as indicating that the Fed may be willing to cut interest rates in the near future.

But according to Paul Niven, Head of Asset Allocation for F&C, yesterday's statement from Ben Bernanke to the joint economic committee of Congress dispelled any misconceptions that inflation was no longer a concern to the Fed.

"Last night, Ben Bernanke sought to clarify the Fed's position by painting a balanced assessment of the US economic outlook and downplaying the risk of an economic spillover from the subprime crisis. However, he did point out that inflation remained "uncomfortably high" and emphasised that "we have not shifted away from an inflation bias." So much for a significant change in policy from the Fed," said Niven.

According to Niven if you read beyond these headlines, it becomes clear that the Fed have simply tried to increase flexibility in terms of future policy direction.

"Bernanke made the assessment that risks to both growth and inflation have increased in recent weeks and, as such, the Fed, like the market, is following the dataflow in deciding how best to react. Recent data releases from the US have been both growth and inflation bearish but the market, however, is not hedging its' bets at present and resolutely expects US interest rates to be cut as the year progresses.

"The outlook remains delicately poised between growth slowing enough to quell inflationary pressures while remaining at a sufficiently high level to continue to prevent the US economy from stalling completely, and slipping into recession," he added.