Despite a recent spike in the unemployment rate, the danger that the US economy has fallen into a "substantial downturn" appears to have waned, US Federal Reserve Chairman Ben Bernanke said on Monday.
Addressing a Fed conference in Chatham, Massachusetts, on Monday night, Bernanke said a government report last week showing the US unemployment rate rising from 5 percent in April to 5.5 percent in May — the biggest one-month jump in two decades — was “unwelcome.” However, the Fed chief said other forces should “provide some offset to the headwinds that still face the economy.”
The Fed’s powerful doses of interest rate cuts, the government’s US$168 billion stimulus package, further progress in the repair of problems in financial and credit markets, a gradual ebbing of the drag from the deep housing slump and still solid demand from abroad for US exports should help the economy over the remainder of this year, he said.
Although economic activity is “likely to be weak” during the current April-to-June quarter, Bernanke said “the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”
Last Friday fears were rekindled that the US could be headed for a deep recession after the unemployment rate zoomed and oil prices registered their biggest single-day leap.
However, Bernanke said, “Recent incoming data, taken as a whole, have affected the outlook for economic activity and employment only modestly.”
Still, soaring energy prices are a double-edged sword for the US. Oil prices closed Monday at US$134.35 a barrel, down from last week’s high of US$139.12 a barrel.
They risk putting a further damper on growth as well as spreading inflation through the economy, Bernanke said.
“The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations,” he said.
The Fed is paying close attention to the extent to which consumers, investors and businesses believe prices will rise in the future, he said. If consumers, investors and businesses believe inflation will continue to go up, they will change their behavior in ways that aggravate inflation, turning it into a self-fulfilling prophecy.
The Fed “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,” Bernanke said.
Inflation forecasting is important to Fed policymakers when determining the best course on interest rates. Even with extensive research over the years, much remains to be learned about both inflation forecasting and inflation control, Bernanke said. And there are areas where additional research could prove helpful.
Policymakers and analysts have often relied on information from commodity futures markets to help shape inflation forecasts, Bernanke said.
In recent years, though, information from futures markets has “underpredicted commodity price increases ... leading to corresponding underpredictions of overall inflation,” he said.
The “poor recent record” on that front raises the question of whether policymakers should continue to use this source of information and, if so, how, Bernanke said.
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