March 5 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is challenging the assumption that closer ties among the world's major economies have held down U.S. inflation.

Globalization, which has reshaped America's economy in the past decade, isn't fully understood by the Fed and may complicate policy making, Bernanke acknowledged in a speech at the Stanford Institute for Economic Policy Research in Stanford, California, on March 2.

The benefits of cheaper imported goods are, at least, countered by higher costs for commodities and energy. Economic expansions in China and India, by contributing to a rally in metals and crude oil in recent years, may even add to inflation, Bernanke added. Inflation has exceeded the Fed's comfort zone for almost three years.

``When the offsetting effects of globalization on the prices of manufactured imports and on energy and commodity prices are considered together, there seems to be little basis for concluding that globalization overall has significantly reduced inflation,'' Bernanke said. ``Indeed, the opposite may be true.''

Bernanke, 53, didn't mention current economic conditions or the outlook for interest rates in his speech.

In response to a question after the address, Bernanke reiterated that the central bank sees no ``spillover'' from rising delinquencies in subprime mortgages. ``We're obviously going to watch it very carefully,'' he added.

Role of Oil

Bernanke didn't dispute that increasing imports from countries such as China have held down the cost of manufactured goods. Oil prices in 2005, though, would have been as much as 40 percent lower if the share of world trade and growth held by non- industrial countries stayed at 2000 levels, he added.

``Globalization has had benefits on the cost of many things we consume,'' said Michael Spence, former dean of the Stanford University Business School and winner of the 2001 Nobel Prize in economics. ``But that doesn't translate into inflation. There's no question commodity price increases are a countervailing force.''

Bernanke stressed that growing links among world economies and markets haven't hindered the Fed's ability to influence the economy through interest rates. Policy makers have kept their benchmark rate at 5.25 percent since August. Prior to that, credit was tightened for two years.

``Globalization of financial markets has not materially reduced the ability of the Federal Reserve to influence financial conditions in the United States,'' Bernanke said. Still, ``globalization has added a dimension of complexity to the analysis of financial conditions and their determinants which monetary policy makers must take into account.''

Debt Ownership

International investors owned more than half of publicly held U.S. Treasury securities last year, while U.S. investors bought more than $1 trillion of foreign assets, Bernanke said.

Congressional leaders almost routinely quiz the Fed chairman on the risk of foreign ownership of U.S. securities. As stock markets tumbled last week, New York Senator Hillary Clinton, a Democratic presidential candidate, called the move a ``wakeup call'' on the amount of debt held by foreigners.

``I have long argued that a great source of vulnerability is the fact that other countries, including China, own so much of our debt,'' she said in a letter to Bernanke and Treasury Secretary Henry Paulson on Feb. 28.

Skepticism in Congress

Fed officials are among the strongest defenders of free trade and capital flows, saying they boost living standards and wealth. Many Democrats, who now control Congress, are skeptical and want the Fed to focus as aggressively on spurring employment and incomes as on keeping inflation low.

``Increasingly, average citizens in America and in other countries have come to doubt that the growth that results from this policy of entirely free capital to move to wherever it finds its best return is in their interest,'' Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, told Bernanke at a hearing on Feb. 15.

Responding to a question from the audience at Stanford, Bernanke said banks should carefully examine applications for mortgages. Hours earlier, the Fed and other regulators published guidelines telling lenders to scrutinize their practices and be more transparent with customers about borrowing risks.

``Banks should be underwriting in a sensible way, which means in particular that banks should not be underwriting borrowers based on the initial interest rate,'' Bernanke said. ``If you have an adjustable-rate mortgage where the interest rate is going to go up, you need to make sure that people can pay the higher rate, not the rate where they start.''

Lending Guidelines

The guidelines reflect growing concern among regulators about an increase in mortgage defaults by homeowners with weak credit after late payments last quarter rose to the highest level in four years. Fremont General Corp., a California lender, on March 2 announced the planned sale of its subprime unit and another California firm, New Century Financial Corp., said it faces a criminal probe.

``So far, the prime market seems to be strong,'' Bernanke said. ``The credit quality in the prime market still seems to be good. We have not yet seen any spillover.''

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

Last Updated: March 5, 2007 00:30 EST