core cpi 0.3, page-4

bernanke boxed Bernanke wants flexibility, but CPI might take it away

By Greg Robb,
Last Update: 3:53 PM ET Jul 18, 2006


WASHINGTON - Federal Reserve Chairman Ben Bernanke will do his best to keep from painting himself into a corner as he begins a report on monetary policy on Wednesday, but the June CPI report could close off his options before the policymaker even speaks, economists said.

The CPI data, to be released ninety minutes before Bernanke begins his two-day testimony, will be the key to whether the Fed will pause in August, economists said.

Right now, Wall Street economists expect the core CPI, excluding food and energy prices, to rise 0.2% in June. See Economic Calendar.
At the moment, financial markets believe there is a 70% chance of a rate hike in August.

"An upward surprise [an 0.3% rise in the core CPI] would close the door significantly further to the pause option, while a downward surprise [an 0.1% rise in the core rate] would leave it very much open," said Peter Hooper, chief economist at Deutsche Bank.

Luckily for Bernanke, he will be able to review the CPI report the night before he testifies to Congress.
Economists said Bernanke wants flexibility because the economy is at a turning point and even the central bank is unsure how many more rate hikes are needed.
"We're in a difficult situation. Inflation is still accelerating, but the economy is slowing," said Joel Naroff, president of Naroff Economic Advisors.

Bernanke will tell Congress only that "it depends" on the economic data where monetary policy should go from here, Naroff said.

If inflation continues to accelerate, the Fed may have to do more. If growth slows enough to keep inflation from picking up, the Fed may be able to do less, Naroff said.

Diane Swonk, said Bernanke has already succeeded in convincing markets that the Fed will pause at some meeting in the non-too-distant future, if not in August.
"Whether it is this meeting, the next meeting or the one after, the idea that we are no longer in 25 basis points-per-meeting mode has already been conveyed," Swonk said.

Bernanke will not provide more direction, but only "context" of the Fed's thinking
"His challenge is to be more Greenspan-esque and say less rather than more," Swonk said.