Financial thoughts

Federal Reserve Chairman Ben Bernanke says the central bank must remain a "dynamic institution" to deal with economic and financial challenges.

The Fed, created in 1913 after a series of bank panics, is now fighting battles on multiple fronts. It is trying to shore up the fragile economy and financial markets, while at the same time trying to prevent inflation from flaring up.

Bernanke’s brief remarks, which dwelled on the history of the central bank, were delivered Thursday during a ceremony dedicating a new building at the Federal Reserve Bank of Kansas City. He didn’t talk about the current state of the economy or the Fed’s next move on interest rates.

The Fed chief and other central bank officials have strongly signaled that the Fed’s rate-cutting campaign, started last September to bolster the economy, is over given mounting concerns that soaring prices for energy and other commodities and the weakened value of the U.S. dollar is aggravating inflation.

Many economists predict the Fed policymakers will hold rates steady at 2%, a four year low, when they meet next on June 24-25.

However, Wall Street investors and others now believe the Fed could start to boost rates later this year if inflation flashes worrisome signs of taking off.

At a dinner on Wednesday night in Kansas City, Bernanke said there was some talk about the Fed’s "history, our current challenges and the future." He didn’t elaborate.

Bernanke, however, went on to say that the Fed has faced many challenges since its founding and has evolved in response freecreditreport. "Ours must be a dynamic institution if it is to successfully fulfill its mission in a changing financial and economic landscape," he said.

The economy has been badly bruised by housing, credit and financial crisis. Economic growth has skidded to a crawl and employers have cut jobs each month so far this year. The unemployment rate jumped to 5.5% in May, from 5% in April - the biggest one-month rise in two decades.

To deal with the crises, the Fed has ratcheted down interest rates aggressively and has taken a number of unconventional steps to help ease credit problems.

In the broadest use of the central bank’s lending power since the 1930s, the Fed in March scrambled to avert a market meltdown by giving investment houses a place to go for emergency overnight loans. The temporary program is similar to privileges long afforded to commercial banks.

In another controversial move, the Fed had helped to financially back JP Morgan’s (JPM, Fortune 500) takeover of Bear Stearns (BSC, Fortune 500), which in mid-March had faced near collapse after a run on the investment bank. 

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