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Prolonged oil-price rise poses downside risk

Published:Wednesday | March 2, 2011 | 12:00 AM

United States 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 US$600-billion bond-purchase programme.

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 nine per cent.

He also cited other risks to the economy, including rising prices for oil, gasolene, 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 programme. He down-played 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 US 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 programme 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.

Could affect inflation

Republicans in Congress and some Fed officials worry that the programme 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.

Senator 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 programme'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 did not provide specifics.

The Fed chairman said the bond programme is needed to energise 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 US$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.

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.

Senator Robert Menendez com-plained that all American families see and are concerned about are rising prices.

Unemployment rates fall

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 six per cent.

"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 US$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 gasolene prices went as high as US$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.

Bernanke also said that a House Republican plan to cut spending would reduce economic growth and increase unemployment.

- AP