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Bernanke: Danger of downturn appears to have faded

(Agencies)
Updated: 2008-06-10 10:18

WASHINGTON -- 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 Bernanke said Monday.

Federal Reserve Chairman Ben Bernanke delivers the Harvard Class Day Speech in Harvard Hard, in Cambridge, Mass. Wednesday, June. 4, 2008. [Agencies]

Addressing a Fed conference in Chatham, Mass., on Monday night, 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) was "unwelcome." However, the Fed chief 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 US 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, Bernanke said "the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."

Last Friday fears were rekindled that the country could be headed for a deep recession after the unemployment rate zoomed and oil prices registered their biggest single-day leap.

However, 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, Bernanke said.

"Inflation has remained high," largely reflecting sharp increases in the prices of globally traded commodities, Bernanke 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 believe prices will rise in the future, he said. If consumers, investors and businesses believe inflation will continue to go up, they will change their behavior in ways that aggravate inflation, turning it into a self-fulfilling prophecy.

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