ben s bernanke : semiannual monetary policy report to the congress testimony by mr ben s bernanke, chairman of the board of governors of the us federal reserve system, before the committee on banking, housing, and urban affairs, us senate, washington, dc, 19 july 2006. * * * mr. chairman and members of the committee, i am pleased to be here again to present the federal reserve's monetary policy report to the congress. over the period since our february report, the u. s. economy has continued to expand. real gross domestic product ( gdp ) is estimated to have risen at an annual rate of 5. 6 percent in the first quarter of 2006. the available indicators suggest that economic growth has more recently moderated from that quite strong pace, reflecting a gradual cooling of the housing market and other factors that i will discuss. with respect to the labor market, more than 850, 000 jobs were added, on net, to nonfarm payrolls over the first six months of the year, though these gains came at a slower pace in the second quarter than in the first. last month the unemployment rate stood at 4. 6 percent. inflation has been higher than we had anticipated in february, partly as a result of further sharp increases in the prices of energy and other commodities. during the first five months of the year, overall inflation as measured by the price index for personal consumption expenditures averaged 4. 3 percent at an annual rate. over the same period, core inflation - that is, inflation excluding food and energy prices - averaged 2. 6 percent at an annual rate. to address the risk that inflation pressures might remain elevated, the federal open market committee ( fomc ) continued to firm the stance of monetary policy, raising the federal funds rate another 3 / 4 percentage point, to 5 - 1 / 4 percent, in the period since our last report. let me now review the current economic situation and the outlook in a bit more detail, beginning with developments in the real economy and then turning to the inflation situation. i will conclude with some comments on monetary policy. the u. s. economy appears to be in a period of transition. for the past three years or so, economic growth in the united states has been robust. this growth has reflected both the ongoing reemployment of underutilized resources, as the economy recovered from the weakness of earlier in the decade, and the expansion of the economy's underlying productive potential,

with high levels of resource utilization that may increase the pricing power of suppliers of goods and services, have the potential to sustain inflation pressures. more generally, if the pattern of elevated readings on inflation is more protracted or more intense than is currently expected, this higher level of inflation could become embedded in the public's inflation expectations and in price - setting behavior. persistently higher inflation would erode the performance of the real economy and would be costly to reverse. the federal reserve must take account of these risks in making its policy decisions. in our pursuit of maximum employment and price stability, monetary policy makers operate in an environment of uncertainty. in particular, we have imperfect knowledge about the effects of our own policy actions as well as of the many other factors that will shape economic developments during the forecast period. these uncertainties bear importantly on our policy decisions because the full influence of policy actions on the economy is felt only after a considerable period of time. the lags between policy actions and their effects imply that we must be forward - looking, basing our policy choices on the longer - term outlook for both inflation and economic growth. in formulating that outlook, we must take account of the possible future effects of previous policy actions - that is, of policy effects still " in the pipeline. " finally, as i have noted, we must consider not only what appears to be the most likely outcome but also the risks to that outlook and the costs that would be incurred should any of those risks be realized. at the same time, because economic forecasting is far from a precise science, we have no choice but to regard all our forecasts as provisional and subject to revision as the facts demand. thus, policy must be flexible and ready to adjust to changes in economic projections. in particular, as the committee noted in the statement issued after its june meeting, the extent and timing of any additional firming that may be needed to address inflation risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by our analysis of the incoming information. thank you. i would be happy to take questions.