Newly appointed Federal Reserve Chairman Ben Bernanke said today that the although the U.S. economy has snapped out of an end-of-year lull, inflation and other risks remain.

Bernanke took the helm of the U.S. central bank from Alan Greenspan on February 1. Today was his first semi-annual testimony to U.S. lawmakers as chairman.

Bernanke said that that low inflation was the key to central banking success, making a deliberate bid to counter fears he may be soft on price pressures.

“Achieving price stability is not only important in itself, it is also central to attaining the Federal Reserve’s other mandate objectives of maximum sustainable employment and moderate long-term interest rates,” he told the House of Representatives Committee on Financial Services.

He explained that the Fed could not afford to be narrow-minded and would continue with the risk-management style of his predecessor.

“Monetary policy-makers must therefore strike a difficult balance — conducting rigorous analysis informed by sound economic theory and empirical methods, while keeping an open mind about the many factors, including myriad global influences, at play in a modern economy like that of the United States,” he said.

Bernanke pledged to follow in the footsteps of former Fed chief Greenspan.

“My intention is to maintain continuity with this and the other practices of the Federal Reserve in the Greenspan era. I believe that, with this approach, the Federal Reserve will continue to contribute to the sound performance of the U.S. economy in the years to come.”

Bay Street economists agree that Bernanke indicated that he leans towards further monetary restraint. The debate is whether just one more rate hike is due, or will it continue hiking rates.

Bank of Montreal says that Bernanke noted that the “expansion remains on track” and the “economy now appears to be operating at a relatively high level of resource utilization.” As a
consequence, “the risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately in the absence of countervailing monetary policy action to further upward pressure on inflation.”

“Given that Bernanke is a proponent of Greenspan’s ‘risk management approach’ to policy making, his comments leave little doubt that he plans to lean against the upside risk to inflation by raising interest rates further,” BMO says.

”Accordingly, a widely anticipated rebound in economic growth to the 4 to 5% range in the first quarter should spur rate increases at both the March 27-28 and May 10 policy meetings, taking the fed funds rate up from 4.50% currently to 5.00%,” BMO predicts. “Slower growth in the
second half of the year, however, should put an end to the tightening cycle, and still softer growth in 2007 should eventually compel policymakers to trim the fed funds rate to a more neutral level of 4.50%.”

“Based on the economic forecast presented by Bernanke to the Congress, one could conclude that he views the balance of risks somewhat tilted on the upside. Thus the chairman is maintaining a tightening bias and a March rate hike seems like a done deal,” agrees National Bank Financial.

“However, the Fed recognised that slower growth in home equity might lead households to trim their spending more than is now anticipated,” it says. “This is what we believe will happen this spring. So we expect the Fed to stop at 4.75 % and be off the hook sooner than generally expected.”