
Bernanke Calmer on Inflation Threat
Krishna Guha
The decline in oil prices and the rally in the dollar is “encouraging”, Ben Bernanke said on Friday, suggesting the Federal Reserve thinks global inflationary pressures could be starting to ease.
Speaking at the start of the Federal Reserve’s annual retreat in Jackson Hole, Wyoming, the Fed chairman said the shift in currency and oil prices, as well as weak growth, “should lead inflation to moderate this year and next”.
The Fed was initially wary of reading too much into the lower oil prices seen in recent weeks, but Mr Bernanke’s comments – the strongest to date – suggest the US central bank is starting to put more weight on the notion that oil prices may now have stabilised.
Mr Bernanke added, however, that the inflation outlook “remains highly uncertain” not least because of the possibility that oil could rebound.
Mr Bernanke said the “financial storm” that broke a year ago had not yet subsided and its effects on the broader economy were “becoming apparent in the form of softening growth and rising unemployment”.
Taken together, his comments underscore that the US central bank has no intention of raising interest rates in the near term, and could keep them on hold through to the end of the year if growth risks remain high and inflation expectations ease in response to weaker growth.
This represents a softening of the Fed’s stance since the period from May to July, when policymakers turned hawkish amid growing inflation fears and hopes that the markets and the economy were turning the corner.
However, Mr Bernanke did not suggest the Fed thought the inflation problem was over simply because oil had moderated. Speaking to central bankers from 43 nations attending the Fed’s annual gathering hosted by the Kansas City Fed, he said the jump in inflation was “in part” the product of a global commodity boom, suggesting other factors could be at work as well.
The US central bank had based its strategy of low interest rates on the assumption that commodity prices would ultimately stabilise, in part due to slowing global growth.
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