Bernanke says crisis not over; prices worry others

By Pedro Nicolaci da Costa

MIDLAND, Texas (Reuters) - Federal Reserve Chairman Ben Bernanke said on Tuesday the credit crisis was not over, even as his colleagues revealed growing concerns about inflation that could signal a pause in interest rate cuts.

"Conditions in financial markets are still far from normal," Bernanke said. "Ultimately, market participants themselves must address the fundamental sources of financial strains. This process is likely to take some time."

A string of other Fed officials in separate speeches seemed increasingly worried that rising energy costs would put upward pressure on inflation, potentially dampening their fervor to cut rates further.

The comments highlighted the Fed's ongoing predicament: It must prevent economic growth from slumping too deeply even as it grapples with price pressures that are largely out of its control.

Bonds sold off sharply following the comments and rate future markets began pricing in strong prospects for higher interest rates by year-end. Stocks improved on the comments, with the Dow industrials and the benchmark S&P 500 paring losses, while the Nasdaq rose.

Dallas Fed President Richard Fisher spoke to the difficulty faced by the central bank, saying a slower U.S. economy would not necessarily bring down commodity costs.

"There still is growth in the world economy, even if we slow down," Fisher said. "It's difficult for me to see a supply response that will feed into that demand to relieve all the price pressures we see on oil."

Like Bernanke, Fisher noted some improvements in market conditions but said the financial sector was "not out of the woods yet."