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Bernanke says economy healing; inflation risks up
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newsbyte on 10 June, 2008 09:47:21
 
Federal Reserve Chairman Ben Bernanke has said that the likelihood of a severe
US economic slump has diminished, while "upside risks" to inflation are forcing
the Fed to be more vigilant.
The comments appeared to reinforce indications from Bernanke and other Fed
members that the central bank is unlikely to cut interest rates further even in
the face of weak economic conditions.
Bernanke, speaking at a forum sponsored by the Boston Fed, suggested the
economy appears to be on the mend even if conditions are fragile, as evidenced
by the jump in unemployment to 5.5 per cent reported last week.
"Despite the unwelcome rise in the unemployment rate that was reported last
week, the risk that the economy has entered a substantial downturn appears to
have diminished over the past month or so," said Bernanke.
"Over the remainder of 2008, the effects of monetary and fiscal stimulus, a
gradual ebbing of the drag from residential construction, further progress in
the repair of financial and credit markets, and still-solid demand from abroad
should provide some offset to the headwinds that still face the economy," he
added.
Bernanke was referring to the government's $168 billion stimulus package
centered on tax rebates to boost consumer spending, and the Fed's aggressive
actions to cut the federal funds rate to 2.0 per cent from 5.25 per cent last
September.
The Fed chief reiterated and expanded on his toughened message on inflation
from last week, arguing that the Fed would work hard to keep inflation
expectations in check, which in turn would help keep a lid on price pressures.
Up to now, he noted that the leap in the price of oil and other commodities has
had a limited impact on inflation but that "this pattern is not guaranteed, and
future developments in this regard will bear close attention."
He added that the latest surge in oil prices "has added to the upside risks to
inflation and inflation expectations."
Along with other Fed members, Bernanke has expressed concern in the past about
public expectations on inflation that prompt workers to seek higher wages and
businesses to raise prices, resulting in an upward price spiral.
Bernanke said the policymaking 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."