- The Washington Times - Tuesday, June 10, 2008

Despite a recent spike in the nation’s unemployment rate, the danger that the economy has fallen into a “substantial downturn” appears to have waned, Federal Reserve Chairman Ben S. Bernanke said Monday.

Addressing a Fed conference in Chatham, Mass., on Monday night, Mr. Bernanke said a government report last week showing the unemployment rate rising from 5 percent in April to 5.5 percent in May - the biggest one-month jump in two decades - is “unwelcome.” However, he 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 $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 U.S. 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, 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 Friday that the country could be headed for a deep recession after the unemployment rate spiked 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 Monday at $134.35 a barrel, down from last week’s high of $139.12 a barrel. They risk 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 said.

The Fed is paying close attention to the extent to which consumers, investors and businesses think prices will rise in the future, he said. If these parties think 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,” Mr. Bernanke said.

Mr. Bernanke spoke Monday evening to a conference on understanding inflation and the implications for Fed policy-makers in setting interest rates. The forum was sponsored by the Federal Reserve Bank of Boston.

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