Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee today that a slowdown in the economy that would keep inflation in check seems to be underway, raising hopes on Wall Street that the Fed will keep short-term interest rates at 5.25 percent.

Bernanke’s delivered his Semiannual Monetary Policy Report to Congress on the same day the June consumer price index report was released, showing a 0.3 percent increase in the core inflation rate.

Despite evidence that prices continue to rise, Bernanke said the Fed must be forward-looking and take into account the possible future effects of previous interest-rate hikes. Although the core inflation rate — which excludes food and energy prices — is running at 2.6 percent so far this year, Bernanke predicted it will be 2.25 percent to 2.5 percent for the year, and 2 percent to 2.25 percent in 2007.

Bernanke’s testimony — which left open the possibility of a pause in interest-rate increases — sent stocks and bonds up in midday trading, erasing losses sparked by the release of the June consumer price index.

The Fed meets Aug. 8 to consider an 18th consecutive increase in the federal funds rate, which serves as a benchmark for other loans. Economists who track the real estate industry have said the slowdown in the housing market should help keep inflation in check, and suggested the Federal Reserve be cautious in raising interest rates. Higher interest rates drive up the cost of mortgages, which can depress housing prices.

In his testimony, Bernanke acknowledged that a run-up in housing prices and increased mortgage rates have cooled the housing market, which could have an effect on consumer spending.

“With homeowners no longer experiencing increases in the equity value of their homes at the rapid pace seen in the past few years, and with the recent declines in stock prices, increases in household net worth are likely to provide less of a boost to consumer expenditures than they have in the recent past,” Bernanke said.

But the Fed chairman also noted that increases in residential rents have recently been a contributor to higher core inflation.

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