–Sustained Commodities Price Rise Threat to Growth and Price Stability
–Downplays Dollar Effect on Oil Prices

By Steven K. Beckner

WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke Tuesday
said the rise in oil and other commodity prices is likely to have only a
“temporary” and “relatively modest” impact on inflation, but said the
Fed is prepared to “respond as necessary” if there is a “sustained” rise
in those prices in congressional testimony.

Bernanke, delivering the Fed’s semi-annual Monetary Policy Report
to Congress, did not say what the nature of that response might be,
saying that “sustained rises” in commodity prices could work in two
different directions — both hurting growth and endangering price
stability.

Bernanke downplayed the influence of movements in the dollar
exchange rate on oil prices.

The Fed chief’s other comments before the Senate Banking Committee
were very similar to testimony he gave on Feb. 9 to the House Budget
Committee.

Speaking on behalf of the Fed’s policymaking Federal Open Market
Committee, Bernanke pointed once again to “increased evidence” of a
“self-sustaining recovery in consumer and business spending” and
projected a “somewhat more rapid pace of economic recovery in 2011.”

However, he reiterated that “job growth remains relatively weak and
the unemployment rate is still high.” He said “it could be several years
before the unemployment rate has returned to a more normal level” and
said that “until we see a sustained period of stronger job creation, we
cannot consider the recovery to be truly established.”

Meanwhile, he said, inflation has declined since the start of the
financial crisis and is apt to remain low.

The FOMC revised up its forecast of growth at its Jan. 25-26
meeting to project real GDP growth of 3.5% to 4% this year. But since
then oil prices have spiked above $100 per barrel in wake of heightened
turmoil in Libya and elsewhere in the Arab world.

So perhaps the most interesting part of Bernanke’s testimony was
his reaction to those recent events.

Acknowledging “significant increases” in gasoline and other prices,
Bernanke observed, “Notably, in the past few weeks, concerns about
unrest in the Middle East and North Africa and the possible effects on
global oil supplies have led oil and gasoline prices to rise further.”

“More broadly, the increases in commodity prices in recent months
have largely reflected rising global demand for raw materials,
particularly in some fast-growing emerging market economies, coupled
with constraints on global supply in some cases,” he continued.

Bernanke made light of any impact on oil prices from dollar
depreciation, saying, “Commodity prices have risen significantly in
terms of all major currencies, suggesting that changes in the foreign
exchange value of the dollar are unlikely to have been an important
driver of the increases seen in recent months.”

He also suggested that the oil spike is unlikely to prove lastingly
inflationary.

For one thing, he said, “The rate of pass-through from commodity
price increases to broad indexes of U.S. consumer prices has been quite
low in recent decades, partly reflecting the relatively small weight of
materials inputs in total production costs as well as the stability of
longer-term inflation expectations.”

What’s more, he added, “Currently, the cost pressures from higher
commodity prices are also being offset by the stability in unit labor
costs.”

And so Bernanke was inclined to be fairly sanguine about the
inflationary implications of the oil upsurge. “Thus, 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 — an outlook consistent with the projections of both FOMC
participants and most private forecasters.”

But hedging his bets, Bernanke added, “That said, sustained rises
in the prices of oil or other commodities would represent a threat both
to economic growth and to overall price stability, particularly if they
were to cause inflation expectations to become less well anchored.”

“We will continue to monitor these developments closely and are
prepared to respond as necessary to best support the ongoing recovery in
a context of price stability,” he said.

But Bernanke gave no indication that the FOMC is likely to either
ease or tighten monetary policy in the foreseeable future.

He called the Fed’s large-scale asset purchase program, better
known as quantitative easing, “effective,” pointing to higher stock
prices, narrower bond spreads and higher inflation expectations. The
rise in long term interest rates he attributed to greater optimism about
the economy.

He gave no indication, however, that the FOMC will authorize
additional Q.E. after the current $600 billion purchase program expires
at the end of June.

Looking down the road, Bernanke reiterated that the Fed has “all
the tools” it needs “to achieve a smooth and effective exit at the
appropriate time.”

Even if bank reserves remain high, he said the Fed will be able to
push short-term rates up by raising the rate of interest it pays on
excess reserves. If necessary, he said the Fed will drain reserves “to
the extent needed to tighten the relationship between the (IOER) and
other short-term interest rates.’

And he swore that “the FOMC remains unwaveringly committed to price
stability and, in particular, to achieving a rate of inflation in the
medium term that is consistent with the Federal Reserve’s mandate.”

** Market News International Washington Bureau: 202-371-2121 **

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