Bernanke: "No Stagflation"

Federal Reserve Chairman Ben Bernanke told Congress Thursday that the nation is "not anywhere near" the dangerous stagflation situation that prevailed in the 1970s.

With the economy slowing and inflation rising, fears have grown that the country could be headed for the dreaded twin evils of stagnant growth and rising prices known as "stagflation."

"I don't anticipate stagflation," Bernanke told the Senate Banking Committee.

Still, high energy prices and rising inflation do complicate the Fed's job of trying to keep the economy growing and inflation contained, Bernanke acknowledged.

High energy prices are creating "inflationary stress," Bernanke said. And, that is "complicating" the Fed's work in terms of shoring up the economy, the Fed chief said.

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Time will tell.

Stagflation?

The U.S. faces an unwelcome combination of looming recession and persistent inflation that is reviving angst about stagflation, a condition not seen since the 1970s...

A simultaneous rise in unemployment and inflation poses a dilemma for Fed Chairman Ben Bernanke. When the Fed wants to fight unemployment, it lowers interest rates. When it wants to damp inflation, it raises them. It's impossible to do both at the same time...

That credibility could be endangered by the Fed's recent track record. Yesterday's forecasts show that FOMC members define price stability as inflation of 1.5% to 2%, measured by an index that differs slightly from the commonly cited consumer-price index. By that measure, inflation has averaged 2.8% since mid-2004, when oil began a multiyear surge. Core inflation, which excludes food and energy, has averaged 2.2%...

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I think inflation is a much bigger concern than a recession at this point.

Stagflation?

Fourth-quarter growth in gross domestic product was lower than expected, rising only 0.6%, compared to forecasts of 1.2% growth and way below the 4.9% growth in the third quarter...

The core personal consumption expenditure (PCE) deflator, an admittedly wonky sounding piece of econojargon that is actually a very important indicator of inflation, rose 2.7% on an annualized basis. That's up from 2% in the third quarter and was higher than the 2.5% that economists were expecting...

But the threat of stagflation, a period of both economic sluggishness and rising price pressures, has to weigh on the Fed when it puts together its carefully constructed statement.

The central bank needs to continue to talk tough on inflation and may need to signal to the market that after today's expected half-point cut - which would leave the federal funds rate at a pretty accommodating 3 percent - that it's time to hold steady for awhile.

As bad as the subprime mortgage mess has been, letting prices for many consumer goods run out of control by further weakening the dollar with aggressive rate cuts could have an even more damaging effect on the economy.

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A return to the late 1970s?