(Bloomberg) – The Federal Reserve’s widely expected interest rate hike next week could prove to be the latest in its current credit crunch campaign, former Chairman Ben Bernanke said.
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“It seems very clear that the Fed will increase another 25 basis points at its next meeting,” he said Thursday during a webinar hosted by Fidelity Investments. “It is possible that this increase in July will be the last.”
Investors seem to agree. They are banking on the virtual certainty of a rate hike at the July 25-26 Fed meeting with limited chances of a further hike thereafter, according to trading in the fed funds futures market.
Speaking as a senior adviser to Pacific Investment Management Co., Bernanke said he sees inflation falling “more sustainably” into the 3% to 3.5% range over the next six months as rents rise and auto prices fall.
“We’ll be down to three, three more by the start of next year and I think the Fed will take its time trying to get to its 2% target,” Bernanke said.
The personal consumption expenditure price index, the Fed’s favorite inflation gauge, rose 3.8% in May from a year earlier. The core PCE price index — which excludes food and energy costs and which Fed officials say is more representative of underlying trends — rose 4.6%.
Bernanke said the Fed will want to see a better balance between demand and supply in the labor market before declaring victory in its fight against inflation. “It’s still pretty hot,” he said of the job market.
While vacancies have fallen, there are still around 1.6 open positions for every person considered unemployed.
The former Fed chairman suggested that the United States would likely suffer a slowdown as part of the price of lower inflation, although he stressed that any recession would likely be mild.
“What we will see is a very modest increase in unemployment and a slowdown in the economy,” he said. “But I would be very surprised to see a deep recession next year.”
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