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Stocks Fall After Warning on Inflation from Central Bank Head

The head of the Federal Reserve, Ben Bernanke, rattled financial markets Monday when he told a Washington audience that the recent inflation rate increases are an "unwelcome development." VOA's Barry Wood reports the markets took the warning as a sign the Fed will continue to raise interest rates, and prices on Wall Street tumbled.

Bernanke's words had an immediate impact on Wall Street. The Dow Jones industrial average was already down, but when the Federal Reserve Board's chairman words reached the market, the index plummeted. In his speech to a bankers group in Washington, Bernanke said there is reason to believe the inflationary impact of the doubling of oil prices over the past 18 months is spreading into the broader economy.

"As yet these [inflationary] expectation measures have remained in the range in which they have fluctuated in recent years," he said. "But these developments bear watching. With the economy apparently now in a period of transition, monetary policy must be conducted with great care."

Bernanke said there are long lags - typically put at 18 months - before changes in interest rates impact the economy. The Fed has raised short-term rates by three percentage points (to five percent) over the past two years. The worry is that at some point higher interest rates choke off economic activity.

Core inflation, which excludes such volatile goods as energy, has risen to three point two percent over the last three months. Core inflation is widely used as a measure of inflationary trends.

Bernanke says the U.S. economy is in the midst of a transition to lower but more sustainable economic growth.

The Federal Reserve will consider changes to short-term rates at its next monetary policy meeting on June 29.