[T.S.R:16991] Bernanke: Sustained Rise In Crude Price Will Hit Economic Growth

Federal Reserve Chairman Ben Bernanke says a prolonged rise in oil prices would pose a danger to the economy. But he says the more likely outcome is a temporary and modest increase in consumer prices - not runaway inflation.

Bernanke, in prepared testimony to the Senate Banking Committee, is more confident that economic growth will increase this year. But he warns it won't be strong enough to quickly lower unemployment, now at 9 percent. He cites other risks to the economy, including rising prices for oil, gasoline, food and other commodities, and further weakness in home prices. Those risks could prompt Americans to spend less.

 

The Fed chief says the economy still needs the support of its $600 billion bond-purchase program. Just as the economy has gained some momentum, a new danger has emerged. Sharply higher fuel costs could prompt people to spend less on other things, slowing the recovery and possibly hiring.

That new risks - along with already elevated unemployment - are likely to be cited by Bernanke as reasons why the Fed must stick with its stimulus program and buy $600 billion worth of Treasury bonds through June.

 

"For Bernanke, the labor market is ground zero for a sustainable expansion," said economist Sal Guatieri at BMO Capital Markets. The Fed's bond-purchase program is intended to spur more spending and invigorate the economy by lowering rates on loans and boosting prices on stocks.

 

However, Republicans in Congress and some Fed officials worry that the program could trigger 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. Bernanke has repeatedly defended the program, saying it is needed to energize growth and reduce unemployment. Fears of inflation are overblown, he has said.

 

Despite the run-up in prices for oil, food and other commodities, Bernanke and a majority of his Fed colleagues have insisted that inflation won't get out of hand. Workers have little power to demand big pay increases because the jobs market - while healing - 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, the Fed predicts.

 

Still, rising prices are a concern for ordinary Americans.

 

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. Prices for household staples including cereal, meat, eggs, poultry, fruits and vegetables marched upward.

 

If gas prices rise to $3.75 a gallon and stay there for a year, it could mitigate 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. That's a remote prospect but one that can't be dismissed.

 

Bernanke testifies before the Senate Banking Committee on Tuesday. The next day Bernanke appears before the House Financial Services Committee. At both sessions, Bernanke will talk about the Fed's economic outlook. The Fed is forecasting the economy to grow at a stronger pace this year - between 3.4 percent and 3.9 percent. But that won't do much to help unemployment.

 

The Fed sees unemployment hovering around 9 percent this year and falling as low as 7.6 percent next year, when President Barack Obama seeks re-election. Normal unemployment is closer to 6 percent. On inflation, the Fed says consumer prices won't exceed 1.7 percent this year. That would be slightly higher than last year, but would still be considered low inflation by historical standards.
 

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Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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