Risk of ’substantial downturn’ of US economy fades: Federal chief

June 10th, 2008 - 11:59 am ICT by IANS  

Washington, June 10 (Xinhua) Risk of a “substantial downturn” of the US economy has faded, Federal Reserve Chairman Ben Bernanke has said. “Although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,” said Bernanke addressing a conference in Chatham, Massachusetts, Monday.

Last week, a government report showed that the US unemployment rate had risen from 5 percent in April to 5.5 percent in May, marking the biggest one-month jump in two decades.

Despite the “unwelcome rise” in the unemployment rate, “the recent incoming data, taken as a whole, have affected the outlook for economic activity and employment only modestly,” the Fed chief said.

Over the rest of 2008, the effects of monetary and fiscal stimuli, a gradual ebbing of the drag from residential construction, further progress in the repair of financial and credit markets, and still-solid demand from abroad should “provide some offset to the headwinds that still face the economy,” Bernanke observed.

However, he also pointed out that “the ongoing contraction in the housing market and continuing increases in energy prices suggest that growth risks remain to the downside.”

Soaring energy prices could be an additional damper on economic growth, besides being instrumental in spreading inflation, Bernanke said.

“Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities,” said the chief.

Thus far, he said, the pass-through of high raw materials costs to the prices of most other products and to domestic labour costs has been limited.

However, the continuation of this pattern is not guaranteed and future developments in this regard will bear close attention.

Moreover, “the latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations,” he said.

Earlier this month, Bernanke signalled that the central bank’s rate-cutting campaign started last September was probably over for now because inflation pressures are rising, driven by surging oil and other commodity prices and a weakening dollar.

“For now, policy seems well positioned to promote moderate growth and price stability over time,” Bernanke said last week.

To prevent the economy from sliding into a recession, the Fed has cut a key interest rate by a combined 3.25 percentage points from 5.25 since last September. Its last action was taken late April, when it cut rate by one quarter point to 2.0 percent.

The Fed is expected to hold rates steady at its next meeting on June 24-25 and probably through much, if not all, of this year.

In the first three months of this year, the US economy grew at an annual rate of 0.9 percent, faster than the 0.6 percent estimated a month ago, according to the commerce department.

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