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VOL. 126 | NO. 42 | Wednesday, March 02, 2011

Bernanke: Rising Oil Prices Pose Threat to Economy

JEANNINE AVERSA | AP Economics Writer

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WASHINGTON (AP) – Federal Reserve Chairman Ben Bernanke told Congress on Tuesday that a prolonged rise in oil prices would pose a danger to the economy. But he said a more likely outcome is a temporary and modest increase in consumer prices, not runaway inflation.

Bernanke, in testimony to the Senate Banking Committee, also defended the Fed's $600 billion bond-purchase program. He told the panel that it's succeeding in helping the economy. But he avoided answering a question about how he measures its success.

Bernanke did express confidence that economic growth would increase this year. He cautioned, though, that it won't be strong enough to quickly lower unemployment, now at 9 percent.

He also cited other risks to the economy, including rising prices for oil, gasoline, food and other commodities, and further weakness in home prices. All could cause Americans to spend less.

The Fed chief said the economy still needs the support of the bond-purchase program. He downplayed the risks of runaway inflation that others have raised.

"The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation," Bernanke said in the first of two appearances this week to deliver the Fed's twice-a-year economic report to Congress.

The bond-purchase program is scheduled to end in June. It is intended to spur more spending and invigorate the economy by lowering rates on loans and boosting prices on stocks.

Republicans in Congress and some Fed officials worry that the program could trigger high inflation and a wave of speculative buying on Wall Street that could lead to new bubbles in the prices of assets like stocks and bonds.

Sen. Richard Shelby of Alabama, the panel's top-ranking Republican, complained that the Fed needs to come up with a way to measure the bond-purchase program's success. Shelby asked Bernanke for detailed information about whether it was a success or failure. Bernanke said it has helped the economy, but he didn't provide specifics.

Bernanke said the bond program is needed to energize growth and reduce unemployment. He blamed the rise in oil and global commodities prices on strong demand from fast-growing countries such as China, not on the Fed's stimulus policy.

Gas prices jumped over the weekend to a new nationwide average of $3.37 a gallon – 26.7 cents a gallon more than a month ago. Food prices in January rose at the fastest since the fall of 2008.

Political upheaval in the Middle East, Bernanke said, has caused oil and gasoline prices to march higher. But Bernanke said he and a majority of his Fed colleagues believe the situation won't lead to out of control inflation.

Workers have little power to demand big pay increases because the jobs market is still weak. Many factories and other companies are operating well below full capacity because customer demand is far from booming. Those forces will prevent inflation from taking off, Bernanke said.

Responding to questions from concerned lawmakers about rising energy prices, Bernanke said the increases seen so far "while a problem for many people, don't pose a significant risk to the recovery or to overall inflation."

Still, a prolonged rise in the price of oil or other commodities would represent a "threat" to economic growth and to inflation, Bernanke acknowledged.

Sen. Robert Menendez, D-N.J., complained that all American families see and are concerned about are rising prices.

The Fed regularly reviews its bond-purchase program. It could buy fewer securities if the economy were to grow more strongly than anticipated or if inflation showed signs of breaking out. Or it could buy more if the economy was in danger of weakening. Most economists believe the Fed will spend the full $600 billion on schedule.

Bernanke says the sharp drops in the nation's unemployment rates over the last two months were encouraging. But he said it will still take "several years" for unemployment to drop back to normal – around 6 percent.

"Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," he said.

If gas prices rise to $3.75 a gallon and stay there for a year, they could erase the benefit of the Social Security tax cut, economists said. The economy would still grow, but it wouldn't get a boost from people spending more on goods and services.

If gasoline prices went as high as $5 a gallon, spending cuts by consumers and businesses could push the economy into a recession, analysts say.

On a separate issue, Bernanke said a failure by Congress to boost the federal government's borrowing authority would be an "extremely dangerous and a recovery-ending event."

Republicans in Congress want to link any increases in the nation's debt limit to cuts in federal spending to reduce the budget deficit. Democrats oppose that strategy.

In the unlikely event that Congress didn't raise the debt ceiling, the federal government wouldn't be able to pay its bills, triggering a financial crisis, Bernanke said. Interest rates would spike, slowing spending by Americans and derailing the recovery.

Bernanke also said that a House Republican plan to cut spending would reduce economic growth and employment. But he suggested the impact would be limited.

Republicans want to slash $60 billion-plus from agency budgets over the coming months as a down payment on larger cuts later in the year. But they are settling for just $4 billion in especially easy cuts as the price for a two-week stopgap bill to avert a government shutdown.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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MORTGAGES 103 400 13,275
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