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Fed chief's comments hint no rate cuts loom

WASHINGTON -- Federal Reserve chairman Ben S. Bernanke said the US economy will pick up in the coming year and emphasized that inflation remains his greatest concern.

"Economic growth will be modestly below trend in the near term," and over the coming year will "return to a rate that is roughly in line with the growth rate of the economy's underlying productive capacity," he told the National Italian American Foundation in New York, his first speech on the economy in four months. "A failure of inflation to moderate as expected would be especially troublesome."

Bernanke's comments indicate he's looking beyond figures released yesterday that point to slackening growth in the final months of 2006.

Policy makers are counting on a slowing expansion to bring down inflation, which is above the tolerance range identified by officials including Bernanke. The Fed left its benchmark overnight lending rate at 5.25 percent for three consecutive meetings and kept a bias toward higher rates each time.

"In the case of inflation, the risks to the forecast seem primarily to the upside," Bernanke said. "Whether further policy action against inflation will be required depends on the incoming data and in particular how these data affect the FOMC's medium-term forecasts."

The Fed chairman said he's watching rising labor costs carefully for signs that employers are passing them on to customers in the form of higher prices.

Bernanke gave no indication the Fed is preparing to raise or lower borrowing costs in the near term and his remarks led bonds and stocks to pare earlier gains. The Fed's interest setting panel next meets on Dec. 12.

Futures traders and some Wall Street economists expect the central bank to lower interest rates next year to support sputtering growth.

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