A late evening fireside chat with gentle Uncle Ben (Barron's PD): Federal Reserve Chairman Ben Bernanke to speak about inflation at the Boston Fed conference, in Chatham, Massachusetts. No Q&A. Speech Highlights: Federal Reserve Chairman Ben Bernanke spoke late this evening on inflation issues. Bernanke noted that the recent surge in oil prices has boosted upside risks to inflation and inflation expectations. He began his prepared remarks by stating that despite an "unwelcome" rise in unemployment, that the "risk that the economy has entered a substantial downturn appears to have diminished over the past month or so." While not saying that there is no actual recession, Bernanke does indicate that any contraction will not likely be substantial. He sees recent economic data as having minimal effect on the outlook for growth. Nonetheless, he changes his wording for near-term growth substantially. Instead of calling for a rebound in growth in the second half, he sees lags from monetary policy and fiscal stimulus, less worsening in housing, continued export growth, and an improved credit market leading to "some offset to the headwinds that still face the economy." This is clearly a downgrade in Bernanke's view of the second half-there is no outright improvement in second half growth mentioned. There is no mentioning of any further rate cuts. The Fed chief sees the key role of the Fed at this point as restoring the financial markets to normal functioning as the best way to support economic growth. The key reason for no mentioning of rate cuts is the Fed's increased concern over rising inflation pressures. "Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities." "Moreover, the latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations." Bernanke appears to corroborate recent comments by other Fed officials that fighting inflation is now the primary focus. "The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation." The Fed Chairman's comments also indicated that the Fed, indeed, realizes that it must start thinking about when to reverse recent interest rate cuts in order to fight inflation. Changes in monetary policy (interest rates) take time to have their full effect. "Because monetary policy works with a lag, policy should be calibrated based on forecasts of medium-term inflation, which may differ from the current inflation rate." There are a number of bottom line conclusions. Bernanke sees the credit markets as having improved and he does not see a significant contraction on the horizon. While the bad news has improved (better credit markets and no deep recession), recent expectations of better news appear to have faded somewhat. That is, Bernanke may not be expecting as much of a second half rebound as discussed in the latest FOMC forecast. And inflation is now the primary concern of the Fed. lj