Bernanke Warns High Oil Prices Could Threaten Economy

Ben BernakeFederal Reserve Chairman Ben Bernanke boldly predicted to Congress on Tuesday that rising oil prices will cause only a brief and modest rise in consumer inflation.

If he's wrong, as some lawmakers suggested to him, the risks are high: a weaker economy and elevated consumer inflation.

Bernanke's credibility is at stake, too. His duties as Fed chief require a balancing act: Leading the economy to stronger growth while making sure inflation doesn't rise too high.

Appearing before the Senate Banking Committee, Bernanke faced sharp questions about whether rising gasoline prices could spread dangerous inflation through the economy. He said he did not think so.

"The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation," Bernanke said.

Still, persistently higher prices could shake consumer confidence, prompting consumers to reduce spending. And that would weaken the economy, he acknowledged.

Gas prices jumped over the weekend to a new nationwide average of $3.37 a gallon. That's 26.7 cents a gallon more than a month ago. Food prices in January rose at the fastest since the fall of 2008.

Sen. Patrick Toomey, R-Penn., called the rise in commodity prices "stunning." Toomey said he worries about the effects of those higher prices, combined with the Fed's efforts to boost the economy through a Treasury bond-purchase program. Toomey said they might be "planting the seeds of serious inflation down the road."

Bernanke defended the Fed's $600 billion Treasury bond-buying program. He said it is still needed to energize the economy and reduce unemployment, now at 9 percent. The bond-buying program is intended to lower rates on loans and lift stock prices, spurring more spending and invigorating the economy. The purchases are scheduled to end in June.

Republicans in Congress and some Fed officials say they fear the bond purchases 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.

"Once price stability has been lost, it is difficult and very costly to regain," warned Sen. Richard Shelby of Alabama, the panel's top-ranking Republican.

Shelby pointed to the toxic situation in the late 1970s and 1980s when inflation hit double digits. To combat out-of-control prices, Fed Chairman Paul Volcker ratcheted up interest rates. Unemployment soared. And the economy fell into a deep recession.

Bernanke said the rise in oil and global commodities prices was due to stronger demand from fast-growing countries like China, not to the Fed's stimulative policies. But he ran into concerns from Democrats as well as Republicans on the committee.

"I see food prices rising," said Sen. Robert Menendez, D-N.J. "I see gas prices rising even before what was happening in North Africa, although that certainly is an exacerbating reality. Tuition rates rising... I just see a combination of rising prices for the average family."

One reason the Fed launched the bond-buying program in November was to prevent deflation - a prolonged drop in prices of goods, wages and values of homes and stocks. But Bernanke told lawmakers that the risk of deflation has become "negligible."

Political upheaval in the Middle East has caused oil and gasoline prices to march higher, Bernanke said. Still, the Fed chief said he and a majority of his colleagues say they believe the situation won't cause out-of-control inflation.

Workers have little power to demand big pay increases because the jobs market is still weak. That will prevent inflation from igniting, Bernanke said.

The Fed regularly reviews its bond-purchase program. It could buy fewer securities if the economy were to grow more strongly than anticipated or if inflation showed signs of breaking out. Or it could buy more if the economy was in danger of weakening. Most economists believe the Fed will spend the full $600 billion on schedule.

On a separate issue, Bernanke said a failure by Congress to boost the 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.

In the unlikely event that Congress didn't raise the debt ceiling, the federal government wouldn't be able to pay its bills, triggering a crisis, Bernanke said. Interest rates would spike, slowing spending by Americans and derailing the recovery.

Bernanke also said that a House Republican plan to cut spending would reduce economic growth and employment. But he suggested the impact would be limited.

Republicans want to slash $60 billion-plus from agency budgets in coming months as a down payment on larger cuts later in the year. But they are settling for just $4 billion in especially easy cuts as the price for a two-week stopgap bill to avert a government shutdown.

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well2

Everything is real fragile right now ,alot of problems out there,oil,food prices, unemployment,low wages, inflation (which connects to food prices )etc.,etc. and everything is looking up maybe for a privilege (Companies and people) Few.

March 02 2011 at 3:35 PM Report abuse rate up rate down Reply
Keith

Let FOX and MSNBC tell you what you should be thinking about?

March 02 2011 at 11:03 AM Report abuse rate up rate down Reply
Keith

Get out of their game, it honestly about us. We share common values about our lives instead of the things they want you to think it's about. Let's get our nation about the PEOPLE of THE UNITED STATES OF AMERICA!

March 02 2011 at 10:23 AM Report abuse rate up rate down Reply
Keith

They actually think these things that they have created are more important than us? Why is the cart before the horse?

March 02 2011 at 10:05 AM Report abuse rate up rate down Reply
Keith

It's not about their phony things that they created with Pragmitism without JUSTICE. It's about us folks North, South, East and west. Something they lost the meaning of.

March 02 2011 at 10:03 AM Report abuse rate up rate down Reply
Keith

I just cannot believe in the situation we are in that on MSNBC they are talking about I Pads and I phones. Do I have to pee and how do I do it gang folks from the USA north, south, east and west?

March 02 2011 at 9:58 AM Report abuse rate up rate down Reply
Keith

Our Military people will take care of us as we re organise with voices from the people who actually make this country what it truly is! Arent thry the people who actually watch our kids die and believe me some of them cry about stuff like that a whole lot. Who else sees it but those guys. Ask a kid to die for who or what? I think these little punks are so lost in a detailed game that goes nowhere that they don't know! Lets ask the men and women who actually have to watch us die to make decisions until we can get things back to an even playing ground or maybe even us loving and respecting each other again.

March 02 2011 at 9:37 AM Report abuse rate up rate down Reply
Keith

What it's going to come down to god love us is we are going to start over. We tearup the roads and highways and we have our fertile ground again. Then we hope the peoplw who built this false empire that hey created don't get us nuked. But I honestly think that wont happen. I have talked to the little guys and gals like us from all over the world. The common people from all over the world know the average person like us have been subjected to the sick ones. Good peole, down to earth people who know what our business is and know what to do!

March 02 2011 at 9:22 AM Report abuse rate up rate down Reply
Keith

What really hurts me folks is that I grew up in Detroit and the kids I went to school with were from all over this country. Honestly Tennessee, Kentucky, Georgia, New York, Pennsylavia, and all of those kids parents looked at me like I was one of their own? We do that because we understand that children are honestly worth no matter where you come from. They have us involved in this media centered game that takes us away from what is truly important. Let them get lost in their lost world. Maybe we can find them an island or something where they can continue on?

March 02 2011 at 9:00 AM Report abuse +1 rate up rate down Reply
jgard911

Has any noticed the public service announcements from BP applauding themselves for paying the shrimp fishermen for lost income because of the Gulf oil spill.
Isnt it nice to know that WE are actually the ones paying the shrimp fishermans salaries with an increase of gasoline prices.

March 02 2011 at 8:59 AM Report abuse +1 rate up rate down Reply