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|  | NOVEMBER 14, 2005
By Rich Miller An End to Fed Rate Hikes?Don't bet on it. Ben Bernanke, the Fed chairman nominee, has to assure lawmakers that he'll be tough on inflation -- but not too toughTo listen to the stock market jockeys tell it, all the ingredients are falling into place for a top-out on interest rates. Energy prices are falling. The dollar is rising, lowering the cost of imports and restraining inflation. And the housing market looks to be cooling. Put it all together, or so the reasoning goes, and surely the Federal Reserve is nearing the end of its 17-month rate-hiking campaign. BALANCING ACT. Not so fast. As Fed chairman nominee Ben S. Bernanke prepares for his confirmation hearing before the Senate Banking Committee on Tuesday, there's scant sign that the central bank is ready to call it quits when it comes to raising rates. With inflation high and unemployment low, Fed policymakers are more likely to err on the side of tighter credit in order to ensure that price pressures are kept in check and the economy doesn't overheat. That's probably doubly true for Bernanke, who has yet to prove his mettle as an inflation fighter. There's no doubt that Bernanke faces a delicate task in balancing competing interests at Tuesday's hearing. As a Fed governor from 2002 to 2005, the 51-year-old economist was a vocal proponent of an ultra-easy monetary policy to combat what turned out to be a nonexistent threat of a deflationary downturn. That has led some investors to question his bona fides as an inflation foe. Indeed, inflation expectations in the bond market have ticked up since President George W. Bush nominated Bernanke on Oct. 24. To help alleviate those fears, the Fed nominee might be inclined to talk tough on Tuesday about the need to contain inflation. That would run the risk, however, of alarming some of the very lawmakers before whom he's appearing. COMFORT ZONE. Unlike outgoing Fed Chairman Alan Greenspan, Bernanke is a proponent of setting a specific inflation target for the Fed. That has led to suspicions among Democrats on Capitol Hill that a Bernanke-led Fed will be overzealous in fighting inflation -- and not do enough to promote economic growth. That's probably not the impression he wants to convey to lawmakers, despite seeming a shoo-in to win Senate confirmation on Feb. 1. Yet the economy also presents Bernanke with a dilemma. Inflation is elevated. After stripping out volatile food and energy costs, the personal consumption expenditure price index -- the Fed's favorite measure of inflation -- is running at a year-on-year rate of 2%. That's at the top end of many Fed policymakers' comfort zone, including Bernanke's. There are also signs that the economy may be slowing: Auto sales have slumped, and the housing market looks to be coming off the boil. On Nov. 8 luxury homebuilder Toll Brothers (TOL ) warned investors of softening demand and a moderation in home-price increases. GREENSPAN'S LEGACY. Which side will prevail? As an academic, Bernanke stressed the importance of the Fed establishing -- and maintaining -- its credibility as an inflation fighter. He believes that it was the loss of that credibility, not the steep runup in energy prices, that led to the double-digit inflation of the 1970s. As Alan Greenspan's successor, he's sure to take the lesson to heart. And that's why investor hopes of an early end to Fed rate hikes may be premature.  Miller is a senior writer in BusinessWeek's Washington bureau Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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