Bernanke says inflation outlook “uncertain”

JACKSON HOLE, Wyoming (Reuters) –

Federal Reserve Chairman

Ben Bernanke on Friday said the stronger dollar and lower oil

prices, along with the weak economy, should curb inflation, in

a hint that interest rates would stay on hold, though he warned

the inflation outlook is “highly uncertain.”

Bernanke called a recent decline in commodity prices and

stabilization of the U.S. dollar “encouraging.”

“If not reversed, these developments, together with a pace

of growth that is likely to fall short of potential for a time,

should lead inflation to moderate later this year and next,” he

told a Kansas City Federal Reserve Bank symposium in Jackson

Hole, Wyoming.

The dollar trimmed gains against the euro as investors bet

that Bernanke’s remarks were evidence of little inclination at

the U.S. central bank to raise rates while markets remained

strained and growth challenged by the housing contraction.

U.S. Treasury debt prices fell as Bernanke’s remarks

reduced safe-haven bids for government bonds, while stocks

jumped.

“There will be no change in monetary policy for the

foreseeable future,” said Kevin Flanagan, fixed income

strategist, global wealth management, at Morgan Stanley in

Purchase, New York. “The emphasis still is on the economic and

market risks, but still trying to walk a fine line on inflation

as well,” he said.

Interest rate futures currently imply a 14 percent chance

the Fed will raise interest rates by a quarter point at its

next scheduled policy meeting, on September 16, with a 38

percent likelihood of a hike by year-end. This was up from odds

of 32 percent before.

The Fed chairman said the U.S. central bank’s current low

interest-rate strategy was conditioned on oil and commodity

prices stabilizing as the global economy slows and that trend

appeared to be happening.

“Nevertheless, the inflation outlook remains highly

uncertain, not least because of the difficulty of predicting

the future course of commodity prices, and we will continue to

monitor inflation and inflation expectations closely,” Bernanke

told a gathering of global central bankers.

The policy-setting Federal Open Market Committee “is

committed to achieving medium-term price stability and will act

as necessary to attain that objective,” Bernanke said.

Meanwhile, Bernanke said a “gale force” financial storm

prompted by a surge in mortgage delinquencies, the collapse of

U.S. housing markets and the freezing of credit has not yet

subsided.

“Add to this mix a jump in inflation, in part the product

of a global commodity boom, and the result has been one of the

most challenging economic and policy environments in memory,”

he said.

Bernanke also outlined the additional steps taken by the

Fed to make billions of dollars available in emergency credit

to keep financial markets from freezing in panic over massive

subprime mortgage losses that have savaged bank capital.

“We will continue to review all of our liquidity facilities

to determine if they are having their intended effects or

require modification,” he said.

He made no explicit reference to troubled U.S.

government-sponsored enterprises Fannie Mae (FNM.N) or Freddie

Mac (FRE.N) in the speech. But he did acknowledge that the

Fed’s rescue of investment bank Bear Stearns created a

potentially problematic “moral hazard” that could prompt

excessive risk-taking if investors believe that some firms are

too big to fail.

Moral hazard is the concept that investors might take

greater risks on the belief that government policy will protect

them from suffering losses.

(Additional reporting by Glenn Somerville and David Lawder

in Washington, John Parry in New York and Ros krasny in

Chicago; Editing by Leslie Adler)