NEW YORK (CNN/Money) -
The Federal Reserve will likely keep short-term interest rates low for a long time -- and could even cut them again -- because of concerns about a continuing drop in inflation, Federal Reserve governor Ben Bernanke said Thursday.
Bernanke, a voting member of the Fed committee that determines the direction of short-term interest rates, said that, although the economy has grown stronger lately, inflation was likely to stay low and unemployment was likely to stay high well into 2004.
The economy, Bernanke said, still has a lot of "slack," consisting of unemployed workers and unused production capacity, and businesses might be slow to use up that "slack," thanks in part to robust productivity gains that have helped them milk more production out of fewer workers, without making expensive upgrades to facilities.
The result could be that the Fed -- which has cut its target for a key short-term interest rate 13 times since early January 2001, to levels not seen in more than 40 years -- will keep rates low through much of 2004, and could even cut them again.
"Indeed, I would argue that, in situations of considerable slack, growth that is generated solely by increased productivity, and that is unaccompanied by substantial employment growth, may possibly require monetary ease, rather than monetary tightening, in the short run," Bernanke said in prepared remarks delivered at a Bloomberg News economics forum panel session in New York.
The bond market seems to have priced in higher inflation expectations lately, as yields have risen quickly. Many analysts think this is because the Fed hasn't made its intention to keep short-term interest rates low for a long time clear enough.
Bernanke, speaking to reporters after the forum, acknowledged there had been some unintentional miscommunication between the Fed and the bond market recently, but said the central bank would seek ways to clear up any differences.
He also suggested that market forces, including a rush of mortgage hedging, had driven bond yields higher than they should be, and he noted that the premium on Treasury Inflation Protected Securities, or TIPS, had a much lower expectation of inflation.
After battling inflation for decades, the Fed has lately grown concerned that inflation is too low, hindering corporate pricing power and profits, helping to keep business investment and hiring sluggish.
McTeer upbeat about job growth
In a separate speech, Dallas Federal Reserve Bank President Robert McTeer also said the Fed would not likely have to worry about inflation for a while, with price increases more likely to slow than accelerate.
"The outlook for inflation seems very positive to me for some time to come, and therefore, I doubt that there will be a need to fight inflation for quite a while," McTeer told the Dallas Chamber of Commerce. "Indeed, I believe that further disinflation is more likely over the next year or so than a resurgence of inflation."
McTeer, who does not currently have a vote on the Fed's policy-making panel, said he thought the U.S. economy's growth was accelerating in the third quarter -- fast enough, in fact, to make a dent in the unemployment rate. Many economists disagree, however, believing it will still be several months before businesses will start hiring in large enough numbers to affect the unemployment rate.
Unemployment was 6.2 percent in July, near the highest level in nine years. The Labor Department is expected to report August unemployment and payroll figures Friday. Economists, on average, expect unemployment to stay at 6.2 percent, according to a Reuters report.
McTeer said he thought it was possible for unemployment to fall below 6 percent in 2003 -- again at odds with the expectations of most economists, who expect unemployment to stay above 6 percent until 2004, according to a recent survey by the Philadelphia Fed.
-- from staff and wire reports