Bernanke Says Inflation Should Slow as Commodities Drop, Dollar Stabilizes

Bernanke to `Act' as Needed for `Medium-Term' Price Stability

By Craig Torres and Scott Lanman

Aug. 22 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said falling commodity prices, a stable dollar and slowing growth should bring down inflation, while warning the central bank will act should prices gains not moderate ``in the medium term.''

Bernanke called dollar stability and price declines in oil and other commodities ``encouraging.'' Still, the inflation outlook remains ``highly uncertain'' and the Fed ``is committed to achieving medium-term price stability and will act as necessary to obtain that objective,'' he said.

Bernanke's speech to the Kansas City Fed Bank's two-day conference on financial stability in Jackson Hole, Wyoming also gave a preliminary view of how the central may alter its supervision of financial institutions. He again defended the Fed's role in keeping Bear Stearns Cos. from collapse, and said ``the economy could hardly have remained immune from such severe financial disruptions.''

The Fed chairman has tried for the past year to curb a global credit crisis that has led to a higher U.S. jobless rate, slower economic growth and some $505 billion in credit losses at financial firms. Inflation has accelerated, with food and energy costs pushing up consumer prices in the 12 months to July by the most in 17 years.

Bernanke asked Congress to give the Fed more authority over the U.S. payments system, and to consider devising a way to resolve failing investment banks. He also said regulators must shift their focus and consider how individual banks and brokers may together present large risks to the financial system.

`More Explicit'

``Making the systemic risk rationale for guidances and reviews'' of financial firms ``more explicit is certainly feasible and would be a useful step toward a more systemic orientation for financial regulation and supervision,'' Bernanke, 54, said to the conference of scholars and central bankers.

The Fed has opened up lending to nonbanks for the first time since the Great Depression, accepted mortgage debt as collateral for loans and cut the interest rate on its discount window lending. The measures have broadened the Fed's oversight and lender-of-last resort role.

Bernanke opened the discount window to investment banks in March after rescuing Bear Stearns Cos. from bankruptcy. The Fed facilitated the firm's merger with JPMorgan Chase & Co. by loaning against $29 billion of Bear securities. It opened the discount window in July to Fannie Mae and Freddie Mac, the largest U.S. mortgage finance companies.

`Over-Extended'

``They are in a lot of new lines of business now in terms of lending to entities they didn't use to, in terms of taking credit risk that central banks don't usually have,'' Vincent Reinhart, a resident scholar at the American Enterprise Institute and former director of the Board's Division of Monetary Affairs said before the speech. ``The Federal Reserve is over-extended.''

Central bankers have also reduced the benchmark lending rate 3.25 percentage points since September to 2 percent. They have kept the rate at that level since April even as the consumer price index rose to 5.6 percent in July, the fastest increase on an annual basis in 17 years.

While the Fed has expanded its lending, markets instability has continued and credit has remained scarce. Investors are concerned mortgages delinquencies will increase, leading to greater losses at banks and other financial institutions.

Shares of Fannie Mae have fallen 58 percent this month, while shares of Freddie Mac have fallen 61 percent.

Nearly a quarter of all adjustable rate mortgages to borrowers with weak or limited credit history were delinquent in the first quarter, according to the Mortgage Bankers Association.

Meanwhile, some 463,000 Americans have lost jobs since January, and economists expect annualized rates of growth of just 1.2 percent in the third quarter and 0.45 percent in the fourth quarter, according to the median estimate in a Bloomberg Survey.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.netScott Lanman in Washington at slanman@bloomberg.net

Last Updated: August 22, 2008 10:00 ED