Feb. 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said nothing new yesterday and the markets loved it.

Bernanke told the Senate Banking Committee that he and his Fed colleagues continue to expect the economy to grow at a healthy pace this year and next as core inflation slowly subsides.

The updated collective forecasts of the members of the Federal Open Market Committee, which Bernanke described, show gross domestic product growth of 3 percent or a little less with unemployment staying close to the current 4.6 percent rate.

The Fed chairman's description of the forces at work in the economy suggested strongly that he thinks those good things can happen without any action on interest rates.

Aside from that, what may have cheered investors is that undeniably patient approach the Fed is taking to nudge inflation down.

As Bernanke reminded the Banking Committee, the FOMC has kept its target for the overnight lending rate at 5.25 percent for five consecutive meetings because ``the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation.''

Of course, with core inflation still a bit higher than officials would like, the FOMC's ``predominant policy concern is the risk that inflation will fail to ease as expected,'' Bernanke said in his testimony. Were that to happen, the committee ``is prepared to take action to address inflation risks if developments warrant,'' he added.

Core Inflation

The forecasts for core inflation -- as measured by the personal consumption expenditure price index, less food and energy items -- are 2 percent to 2.25 percent this year and 1.75 percent to 2 percent in 2008.

In other words, core inflation is expected to fall to 2 percent or less, which is where most, if not all, Fed policy makers want to see it by some point next year.

``The market now is divided between whether the next move will be a hike or a cut, so that's a great position for a central bank to be in, when people don't know because they don't have a strong opinion one way or the other,'' David Malpass, chief economist at Bear Stearns, said in a Bloomberg interview before the hearing.

Furthermore, Malpass said, the lack of a strong view isn't caused by the Fed not communicating with the public.

``It used to be that people would be uncertain about the next move because they didn't know what was on the Fed's mind,'' he said. ``Now we're in a position where we hear from the Fed pretty much weekly, as far as what someone's views are.''

Strong Evidence

In addition, the minutes of each FOMC meeting are released only three weeks later, he said.

``I think it's interesting and very good -- strong -- to be in a position where people have full information and yet still don't know which way the next move by the Fed will be,'' Malpass said.

Indeed, Fed officials are pleased that that's the case.

For one thing, it is strong evidence that the decision to pause in raising rates following the increase in the lending rate target to 5.25 percent last June was a correct one. And it also means they have the flexibility to raise or lower the target --or to leave it alone -- depending on economic developments.

Another reason for the markets' uncertainly about future Fed policy is the substantial disagreement among private forecasters over where growth and inflation are headed.

Malpass, for instance, is among those who think inflation may rise rather than decline, and that the Fed will respond.

No Rush

``They'll probably hike a little bit, but it won't be a big deal for the economy or the markets. Remember, they've already done 17 hikes and equities went up and the economy did well,'' he said.

Other economists expect growth to weaken enough and reduce inflation pressures that the Fed will ease later this year.

Either outcome is possible, though Fed officials aren't going to be in a hurry to act. That sense of patience runs through much of the Fed's semi-annual report on monetary policy, which also was presented to the Banking Committee yesterday.

As Bernanke testified yesterday, ``Monetary policy affects spending and inflation with long and variable lags. Consequently, policy decisions must be based on an assessment of medium-term economic prospects.''

That, the Fed chairman said, means that ``policy makers must be prepared to respond flexibly to developments in the economy when those developments lead to a re-assessment of the outlook.''

Or, put another way, policy makers will respond only when such developments indicate the officials' collective forecast is going off track. There will be no rush to judgment.

(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net.

Last Updated: February 15, 2007 00:09 EST