Bernanke May Sound Tougher on Inflation to Avert Fed Rebellion

By Scott Lanman

Aug. 5 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke, likely to leave interest rates unchanged today, may need to sound tougher on inflation to avert the sharpest public disagreement among policy makers in more than a decade.

The fastest inflation in 17 years adds to the risk that three members of the Federal Open Market Committee will dissent for the first time since 1992. Gary Stern, president of the Fed's Minneapolis bank, and the Philadelphia Fed's Charles Plosser joined Dallas's Richard Fisher since the last meeting in June in calling for an increase in rates to limit price increases.

The trio wield more clout than usual because two seats assigned to Fed governors on the 12-member panel are currently vacant. That means Bernanke must craft a consensus that's responsive to the their inflation warnings while still heeding tumbling housing prices, a faltering economy and the worst credit crisis since the Great Depression.

``Bernanke and Kohn would struggle like heck to make sure there were not three dissents,'' said Wachovia Corp. Chief Economist John Silvia, referring to Fed Vice Chairman Donald Kohn. ``They would probably be biased in their statement to really be focused more on inflation.''

Lehman Brothers Holdings Inc. economists forecast a ``significant chance,'' though less than 50 percent, that Stern, 63, will join Fisher and Plosser.

The FOMC is scheduled to announce its decision at about 2:15 p.m. in Washington. The benchmark rate will be held at 2 percent, according to all 69 economists surveyed by Bloomberg News.


End to Easing

Fisher, 59, was the lone official to favor higher borrowing costs in June, his fourth dissent of the year. The rest of the panel voted to keep the federal funds rate unchanged, ending a series of cuts that had slashed it by 3.25 percentage points since September.

Stern said in a July 18 interview with Bloomberg News that the central bank shouldn't wait for housing and financial markets to stabilize before tightening. Plosser, 59, who dissented from two reductions this year, said July 22 that rates should rise ``sooner rather than later.''

A vote for tightening by the three district-bank presidents would fuel speculation among investors that Bernanke will be pushed into an increase earlier than he might prefer, said Standard & Poor's Corp. Chief Economist David Wyss.

`Awkward Position'

``It puts the Fed in an awkward position,'' said Wyss, a former Fed economist based in New York. The central bank ``may end up tightening just as we go into a deeper recession,'' he said.

Futures traders aren't betting on a move before September, though they do anticipate a quarter-point increase by December.

Ten officials will decide the price of money today: Four are district-bank leaders that rotate into voting slots each year, joining five Washington-based governors. The New York Fed president has a permanent slot as the FOMC's vice chairman and tends to back the chairman.

The other district-bank president with a say is Cleveland Fed chief Sandra Pianalto, who hasn't bucked the consensus once since her appointment in 2003. One of the vacant governor seats will be filled by Elizabeth Duke, who has been confirmed as a governor by the Senate, though not yet sworn in.

Bernanke has acknowledged inflation pressures, while expressing concern about the fragility of the economy. In testimony to Congress on July 15, he described ``significant downside risks'' to growth and worsening ``upside risks'' to inflation.

BOE Approach

Bernanke may be willing to accommodate dissent. Bernanke has praised the Bank of England, whose chief, Mervyn King, has been outvoted twice on rates, as a ``leading exponent of increased transparency.''

Bernanke has also opened up FOMC meetings to allow officials to speak out of turn during debates. That means the sessions may resemble the frank exchange of conflicting views common to Bernanke's discussions during 23 years as an economics professor, said Edward McKelvey, a senior U.S. economist at Goldman Sachs Group Inc.

In 20 FOMC interest-rate decisions as chairman, Bernanke has recorded nine with one dissenting vote and two with a pair of `nays.' His predecessor, Alan Greenspan, had 17 decisions with one or two dissents in his last 10 years as Fed chief.

Since the June FOMC meeting, crude oil rose to a record $147.27 a barrel on July 11 before dropping 18 percent. A government report showed consumer prices surged 5 percent in the 12 months through June, the biggest jump since 1991.

1992 Revolt

The last time three policy makers dissented was Nov. 17, 1992, when one governor and two district-bank presidents argued for stricter anti-inflation words or action. A month earlier, four rebelled for similar reasons.

Not all inflation signs are pointing up. Consumers last month expected inflation over the next five years to be 3.2 percent, down from a forecast of 3.4 percent in June, according to the Reuters/University of Michigan survey. Home prices in 20 metropolitan areas fell 15.8 percent from a year earlier, based on the S&P/Case-Shiller index.

And any tolerance by Bernanke for dissent may be outweighed by the need to avoid spooking investors. ``They know that the markets would not take that well,'' McKelvey said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net