Financial Times | Bernanke calmer on inflation threat

Financial Times, By Krishna Guha in Jackson Hole, Wyoming

Published: August 22 2008 15:14 | Last updated: August 22 2008 23:46

The decline in oil prices and the rally in the dollar was “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, Mr Bernanke 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 crude oil’s recent fall from more than $147 a barrel earlier this year to $114.59 at week’s end. But Mr Bernanke’s comments suggest the US central bank is starting to put more weight on the notion that oil prices may have stabilised.

Mr Bernanke added, however, that the inflation outlook “remains highly uncertain” as oil could rebound. Axel Weber, head of the Bundesbank, told the FT: ”In my view, there are still persistent high inflation risks in the euro area.”

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 suggest the Fed has no intention of raising interest rates in the near term, and could keep them on hold until 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 earlier this year when policymakers turned hawkish amid growing inflation fears and hopes the economy was turning the corner.

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.

Mr Bernanke’s comments came as data showed Britain’s economy shuddered to a halt in the second quarter, ending a 16-year run of unbroken growth.

Revised figures downgraded initial estimates of second-quarter UK growth from 0.2 per cent to zero, prompting sterling to slide to a two-year low against the dollar of $1.8507.