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Bernanke's clear message: Inflation's cooling off

Federal Reserve Chairman Ben Bernanke testifies before the US Senate Banking, Housing and Urban Affairs Committee on Capitol Hill.

KAI RYSSDAL: Ben Bernanke's obviously a pretty bright guy. But investors took his Congressional testimony today as quite nearly infallible. The Fed chairman has to give Congress an update on the economy twice a year. Today it just happened to be on the day the Commerce Department released June's consumer inflation report. Three-tenths percent for the core rate. Which leaves out food and energy. On an annual basis, that's a bit high for the Fed. But Bernanke's remarks this morning were just what the markets wanted to hear. Marketplace's Hillary Wicai reports.


HILLARY WICAI: Fed Chairman Ben Bernanke didn't mince words. There's wasn't a hint of his predecessor's cryptic pronouncements. There was no decoding needed:
BEN BERNANKE: The projections of the members of the Board of Governors and the presidents of the Federal Reserve banks, which are based on the information available at the time of the last FOMC meeting, are for a gradual decline in inflation in coming quarters.

That's right. A "gradual decline in inflation." Bernanke acknowledged rising energy prices are still a concern. But he also said the Fed's economic forecast calls for moderation in economic growth. A cooling housing market is one reason for the slowdown. Just today the Commerce Department reported June housing starts fell more than 5 percent. Mark Zandi at Moody's Economy.com explains why that slower growth is a good thing when it comes to inflation.

MARK ZANDI: Having a chocolate chip cookie is great. Having two is OK. Having three and you kind of get sick. Too much growth ultimately leads to an economy operating beyond its capacity.

Bernanke also suggested past rate increases are still having an effect. He talked about the lag time between when interest rates are boosted and when the economy feels it.

BERNANKE: The lags between policy actions and their effects imply that we must be forward looking, basing our policy choices on the longer term outlook for both inflation and economic growth.

Andrew Balls with the Pacific Investment Management Company explains.

ANDREW BALLS: Economists tend to say it takes six months, but probably one year to two years, for economy to feel the full impact of past interest rate increases.

So, Bernanke seems to be saying, maybe the Fed's done enough with 17 straight hikes? Balls says Bernanke's remarks give the Fed some flexibility. If the Fed isn't already done, it will likely be done soon enough with increases to interest rates.

In Washington, I'm Hillary Wicai for Marketplace.

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