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Oil won't derail US expansion -Bernanke
Updated: 2004-08-24 08:45

Rising oil prices will weigh on U.S. economic growth, but the increases seen so far will not derail the expansion and need not fuel a troubling inflation, Federal Reserve Board Governor Ben Bernanke said on Monday.

"There's going to be a little bit of a slowdown effect ... but at the current levels, anyway, I think it won't derail what looks like a self-sustaining expansion at this point," Bernanke said in an interview with the public television program Nightly Business Report.

Bernanke described current U.S. monetary policy, with overnight borrowing costs at 1.5 percent and the central bank on a "measured" course of rate increases, as "very accommodative" and said risks appeared balanced between the potential for a pickup in inflation and slowing growth.

"I think the risks are balanced ... and that therefore our policy seems to me to be quite appropriate," he said.

When Fed officials raised interest rates a quarter-percentage point just under two weeks ago, they said the economy appeared poised for an acceleration after a soft patch brought about in good measure by high energy prices.

Oil prices have gained further since then, although a rally that took U.S. crude up to a record $49.40 late last week has fizzled. U.S. crude settled at $46.05 on Monday.

Bernanke said rising oil prices presented a "very tough call" for central bankers, because energy price gains not only slow growth but push up inflation. He said the central bank would have a much freer hand if oil price increases did not end up feeding so-called second-round inflation effects.

"If inflation is low and stable and people believe it will be low and stable, an increase in oil prices will create, of course, a transitory burst in inflation," Bernanke said. "But as long as it doesn't get embedded into wage demands and prices, it won't necessarily create a longer-term increase in inflation."

"I think that the Fed has some scope to respond to the weakening of the economy associated with an oil price increase so long as we are confident that inflation will remain stable, that there will not be second-round effects that will endanger price stability," he added.

The latest run-up in oil prices has led some economists to scale back their forecasts for U.S. economic growth and warn that a soft patch the economy hit in the second quarter as consumers retrenched could prove prolonged.

Bernanke, however, said it appeared that consumer spending was already gaining altitude. "Most of the evidence we have suggests it has picked up fairly considerably ... and that's going to support growth going forward," he said.

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