US downturn danger fading, says Fed chief

The danger of the US economy tumbling into a “substantial downturn” appears to have waned despite a recent increase in unemployment figures, Federal Reserve chairman Ben Bernanke said early today.

Addressing a Fed conference in Chatham, Massachusetts, Mr Bernanke said a government report last week showing the unemployment rate rising from 5 to 5.5% in May – the biggest one-month jump in two decades – was “unwelcome”, but 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 £84bn 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 was “likely to be weak” during the current April-to-June quarter, Mr Bernanke said “the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so”.

Fears were rekindled last Friday that the country could be heading for a deep recession after the unemployment rate zoomed and oil prices registered their biggest single-day leap.

However, Mr 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 country. Oil prices closed yesterday at $134.35 (€168) a barrel, down from last week’s high of $139.12 (€175). They risked putting a further damper on growth as well as spreading inflation through the economy, Mr Bernanke said.

“Inflation has remained high”, largely reflecting sharp increases in the prices of globally traded commodities, he said. “The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations,” he added.

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 behaviour 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 destabilising for growth as well as for inflation,” Mr Bernanke said.

Last week, Mr Bernanke sent his strongest signal yet that the Fed’s rate-cutting campaign was probably over for now because of growing concerns that soaring oil and other commodity prices – along with a weakened dollar – were aggravating inflation.

To help brace the economy, the Fed dropped rates in late April to 2%, a nearly four-year low, continuing a rate-cutting campaign that started last September.

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