Last week, Fed Chairman Ben Bernanke, in a speech before the National Italian American Foundation, in New York City, provided what could be an early Christmas gift in presenting his update on the economy. The Chairman's remarks were, for the most part, upbeat in terms of inflationary concerns…a positive sign indeed.

The following are excerpts from his speech that may be a clue to the Fed's next moves. Source: U.S. Federal Reserve "The deceleration in economic activity currently under way appears to be taking place roughly along the lines envisioned in the Federal Reserve's July report. As anticipated, the slowdown primarily reflects a cooling of the housing market. Most other sectors of the economy appear still to be expanding at a solid rate, and the labor market has tightened further.

Inflation, which picked up earlier this year, has been somewhat better behaved of late. Overall inflation was pushed up this spring by a surge in energy prices, but the recent declines in energy prices have largely reversed those effects. Price inflation for consumer goods and services excluding energy and food, the so-called core inflation rate, has also moderated a bit in the past few months. But the level of the core inflation rate remains uncomfortably high.

Over the next year or so, the economy appears likely to expand at a moderate rate, close to or modestly below the economy's long-run sustainable pace. Core inflation is expected to slow gradually from its recent level, reflecting the reduced impetus from high prices of energy and other commodities, contained inflation expectations, and perhaps further reductions in the rate of increase of shelter costs and some easing in the pressures on capital and labor resources. However, substantial uncertainties surround this baseline forecast. The Federal Open Market Committee (FOMC), the committee that sets monetary policy, will continue to monitor the incoming data closely. In its latest statement, the FOMC reiterated its view that the upside risks to inflation are the predominant risks to the forecast and indicated that it is prepared to take action to address inflation if developments warrant."

Further, Bernanke addressed inflation with an eye toward the future. "Looking forward, core inflation seems likely to moderate gradually over the next year or so. Some of the factors that pushed up core inflation in the recent past--in particular, energy prices and shelter costs--appear likely to be more neutral in the coming year, and inflation expectations remain contained. Moreover, if, as seems most probable, the economy grows at a rate modestly below its potential for a time, pressures on resource utilization should ease a bit……..Needless to say, we will continue to monitor the inflation situation closely. Whether further policy action against inflation will be required depends on the incoming data and in particular on how these data affect the FOMC's medium-term forecasts of both inflation and output growth."

Best of all, his sense of optimism does encourage. "However, in reviewing the economic developments of recent years, one cannot help but be impressed by the dynamism and resilience of the U.S. economy. I have confidence, therefore, that however events play out in the short term, in the longer term the economy will grow at a healthy pace, raising living standards in the process. The Federal Reserve will continue to play its part by implementing policies designed to achieve its mandate of fostering price stability and maximum sustainable employment."

Inherent every prediction lurks the reality that there is no such thing as a crystal ball, but let's hope for happy holidays and beyond.