FED TALKS TOUGH ON INFLATION DESPITE SLOWDOWN

Although the anticipated slowdown in growth is underway, financial markets shouldn't question the inflation-fighting credentials of the Federal Reserve Bank, Chairman Ben Bernanke said Monday.

"There is a strong consensus" among FOMC members to keep inflation low, Bernanke told an international banking forum here.

Recent core inflation readings "have been higher in recent months" and "has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth," Bernanke said.

These core readings "are unwelcome developments," he said.

"Therefore, the FOMC will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained," Bernanke said.

Bernanke noted that inflation expectations have edged up, but said they still remain in the ranges "in which they have fluctuated in recent years."

"But these developments bear watching," he said.

To keep inflation anchored, the Fed must have a strong commitment to maintain price stability and also "a consistent pattern of policy responses to emerging developments as needed to accomplish that objective," he said.

Bernanke said the slowdown in the U.S. economy is no longer simply a forecast.

"Real domestic product grew rapidly in the first quarter of this year, but the anticipated moderation of economic growth seems now to be under way," Bernanke said.

Consumer spending has been slowing in recent months, probably due to higher energy prices, he said.

Despite all the noise in the statistics, there is no doubt that the housing market is slowing, he added.

The May job report and other indicators are consistent with the softening in economic activity, he said.

With the slowdown emerging, the Fed must be cautious as it sets monetary policy.

"With the economy now evidently in a period of transition, monetary policy must be conducted with great care and with close attention to the evolution of the economic outlook as implied by incoming information," Bernanke said.

The Fed chief said the central bank will focus particular attention on "the medium-term outlook for inflation."

Bernanke said the FOMC will seek a growth path for the economy near the trend-rate of growth, usually put by economists in a range of 3%-3.5% real GDP growth.