July 10 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said inflation expectations ``remain imperfectly anchored'' in part because the public doesn't know the central bank's goal for prices.

What inflation rate the Fed prefers ``is not fully known by private agents,'' Bernanke said in a speech to the National Bureau of Economic Research in Cambridge, Massachusetts today. ``Long-run inflation expectations do vary over time,'' he added. ``They are not perfectly anchored.''

Variability in the public's outlook raises ``issues of credibility and institutional design,'' he said. Bernanke has sought to depersonalize policymaking and commissioned a study on Fed communication a year ago. As a Fed governor and academic, he was critical of the central bank for basing its credibility in the office of the chairman instead of the institution.

Bernanke, who didn't comment on the outlook for the economy or interest rates, still acknowledged that expectations are more tethered than they have been in the past.

``The sharp increases in energy prices over the past few years have not yet led either to persistent inflation or to a recession, in contrast, for example, to the U.S. experience of the 1970s,'' Bernanke said. ``Although inflation expectations seem much better anchored today than they were a few decades ago, they appear to remain imperfectly anchored.''

Preferred Measure

Bernanke also said that as long as price expectations are well anchored, the Fed is justified in using core measures of inflation, which exclude energy and food costs.

``If inflation expectations are well anchored, changes in energy and food prices should have relatively little influence on core inflation,'' Bernanke said.

The Fed has come under criticism in Europe for using core inflation as its preferred gauge.

Bank of England Chief Economist Charles Bean said in front of Fed officials at an annual monetary policy symposium in Jackson Hole, Wyoming, last year that it was ``highly suspect.''

Bernanke's speech commented extensively on the Fed's modeling of inflation and inflation expectations. He defined ``anchored'' inflation expectations as a condition where relative prices change, though overall prices remain stable in the event of a supply shock such as higher energy costs.

``The basic theme is the Fed is committed to maintaining stable inflation expectations,'' said Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut. ``If one wants to know when the Fed will move, it is when inflation expectations or core inflation moves or both.''

Treasury Yields

Treasury securities, which were up before Bernanke's remarks, were little changed after the text's release. The yield on the benchmark 10-year note was 5.03 percent at 3:26 p.m. in New York, from 5.13 percent late yesterday.

The Fed chief declined to directly answer a question on whether the panel studying changes in the central bank's communication practices would endorse an inflation target. Vice Chairman Donald Kohn heads the subcommittee.

``We are making very good progress and I hope we will be able to come forward in the reasonably near future with some suggestions and ideas,'' Bernanke said.

Whatever the FOMC does will be ``entirely consistent with the dual mandate'' the Fed has received from Congress to achieve both stable prices and full employment, he said. ``We are moving in a very collegial and intellectually interesting way.''

``When the message from the central bank isn't clear, you lose credibility,'' said Benjamin Tal, senior economist at CIBC World Markets Inc. in Toronto. Bernanke's message is that ``credibility is the number-one factor'' in Fed policy now, Tal said.

Fed's Stance

Fed policy makers have sought to stem inflation that for three years exceeded the tolerance range of several officials, while keeping the economy afloat through the worst housing recession since 1991. The Fed has kept its benchmark rate unchanged for a year after raising it 17 times from June 2004.

The Federal Open Market Committee reiterated in its June 28 statement that inflation was the ``predominant'' policy concern, while keeping its target for the overnight lending rate between banks at 5.25 percent.

Bernanke's remarks come a week before his two-day, semiannual monetary policy testimony on Capitol Hill, when Fed policy makers publish their latest economic forecasts.

Inflation has receded, with the personal consumption expenditures price index, excluding food and energy costs, rising 1.9 percent in May from a year ago. The rate has fallen for three straight months from 2.4 percent in February, which matched the highest recording since 1995.

`Comfort Zone'

Bernanke, 53, stated before becoming Fed chairman that his ``comfort zone'' for the core price measure was 1 percent to 2 percent.

Still, policy makers have been reluctant to declare victory on inflation because the unemployment rate continues to hover near its lowest in six years. The ``high level of resource utilization'' poses a risk to the outlook for continued moderation in prices, the Fed said two weeks ago.

Growth, meanwhile, is accelerating as Fed policy makers predicted. Economists estimate the economy expanded at a 3 percent annual rate last quarter after growing just 0.7 percent, the slowest in four years, in the previous three months.

Energy prices are also contributing to cost pressures. Oil prices have climbed 19 percent this year.

The Reuters/University of Michigan survey of inflation expectations over the coming five years has averaged 3 percent in the past 24 months. That's in line with core inflation of about 2 percent, after adjusting for measurement bias, Mishkin said in his March remarks.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.netScott Lanman in Washington at o slanman@bloomberg.net.

Last Updated: July 10, 2007 17:46 EDT