February 26, 2006	Sunday	Muharram 27, 1427

WASHINGTON, Feb 25: The US Federal Reserve needs to keep inflation low to meet its other mandated goals of high employment and moderate long-term interest rates, new Fed Chairman Ben Bernanke said on Friday.

Stable prices are desirable in themselves and thus are an important goal of monetary policy, Bernanke said in remarks at Princeton University. But stable prices are also a prerequisite to the achievement of the Federal Reserve’s other mandated objectives, high employment and moderate long-term interest rates.

In particular, low and stable inflation and inflation expectations enhance both economic growth and economic stability, he said. His speech, largely a historical overview, offered no clues on the immediate Fed policy outlook.

Bernanke, sworn in as central bank chief on Feb. 1, said the public’s confidence the U.S. central bank would keep price increases under wraps had established a “virtuous circle” by making it easier for policy-makers to achieve that goal, even while acting to buffer the economy in bad times.

In particular, he said, well-anchored inflation expectations had helped mute the impact oil price increases in recent years have had on other costs throughout the economy.

He contrasted the current period with the 1970s, a period in which sky-rocketing oil prices fueled a broader inflation.

Bernanke, a former Fed governor who had served since last June as an economic adviser to President George W. Bush before moving back to the central bank, said policy-makers in that earlier period thought they could boost employment by accepting a little more inflation.

But he said that line of thinking was now outmoded.

The evidence has mounted not only that low and stable inflation is beneficial for growth and employment in the long-term but also that it contributes importantly to greater stability of output and employment in the short to medium term, he said.

Bernanke said that was because when inflation was low and stable, expectations of future inflation could be kept low and stable as well.

The anchoring of inflation expectations in a narrow range has been the product of Fed policies that have kept actual inflation low in recent years, clear communication of those policies, and an institutional commitment to price stability, he said.

The Fed has not had to raise interest rates sharply as it did in the 1970s but instead has been able to pursue a policy that is more gradual and predictable because inflation expectations are contained, Bernanke said.

—Reuters