Fed chief optimistic on US economy
Bernanke says risk of "substantial downturn appears to have diminished".
Last Modified: 10 Jun 2008 06:48 GMT
Bernanke said interest rate cuts and a government stimulus package should help the economy [EPA]
Fears that the US economy has entered a "substantial downturn" appear to have "diminished", the US Federal Reserve chairman says.
Ben Bernanke said while economic activity was "likely to be weak" in the April-to-June quarter, "the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so".
Bernanke's relatively optimistic assessment of the US economy on Monday came despite a recent spike in the US unemployment rate.

A government report last week showing the unemployment rate rising from 5 per cent in April to 5.5 per cent in May - the biggest one-month jump in two decades - was "unwelcome", Bernanke said while addressing a federal reserve conference in Massachusetts, on Monday night.


Positive forces


But other forces should "provide some offset to the headwinds that still face the economy", he said. 


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The Fed's interest rate cuts, the government's $168bn stimulus package, further progress in the repair of problems in financial and credit markets, a gradual ebbing of the drag from the deep housing slump and still solid demand from abroad for US exports should help the economy over the remainder of this year, he added.


Last Friday, fears were rekindled that the country could be headed for a

deep recession after the unemployment rate zoomed and oil prices registered their biggest single-day leap.


However, Bernanke said "recent incoming data, taken as a whole, have

affected the outlook for economic activity and employment only modestly".


Soaring energy prices are a double-edged sword for the US.


Oil prices closed Monday at $134.35 a barrel, down from last week's high of $139.12 a barrel.


They risk putting a further damper on growth as well as spreading inflation through the economy, Bernanke said.


"Inflation has remained high," largely reflecting sharp increases in the prices of globally traded commodities, Bernanke said.


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


In video

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The Fed is paying close attention to the extent to which consumers, investors and businesses believe prices will rise in the future, he said.


If consumers, investors and businesses believe inflation will continue to go up, they will change their behaviour in ways that aggravate inflation, turning it into a self-fulfilling prophecy.


The Fed "will strongly resist an erosion of longer-term inflation expectations, as an un-anchoring of those expectations would be destabilising for growth as well as for inflation," the US central bank chairman said.


Last week, Bernanke sent his strongest signal yet that the Fed's rate-cutting campaign was probably over for now because of growing concerns that soaring oil and other commodity prices, along with a weakened dollar, were aggravating inflation.


To help brace the economy, the Fed dropped rates in late April to 2 per cent, a nearly four-year low, continuing a rate-cutting campaign that started last September.


Credit crisis remains


Despite Bernanke's fairly upbeat assessment, the fourth biggest investment bank in the US confirmed fears on Wall Street that the credit crisis was not over.


Lehman posted its first ever loss since
going public 14 years ago [Reuters]
Lehman Brothers on Monday said wrong-way trading moves and risky mortgage-backed securities plunged it into a nearly $3bn second-quarter loss, the first time it failed to post a profit since going public in 1994.


Lehman said it expects to lose $2.87bn, or $5.14 per share, for the period ended May 31, compared with the $1.3bn, or $2.21 per share, it made in the same period last year.


In response, Lehman's top executives assured investors they would fund the firm's revival by raising $6bn of fresh capital to cover the loss.


The announcement, made before the official June 16 release date of the firm's results, comes three months after the collapse of Bear Stearns shook the market.


Analysts had expected Lehman to report a loss of just 22 cents per share for the period, according to Thomson Financial, and believe that the much deeper loss could have an impact on rivals.


David Trone of Fox-Pitt Cochran said there was "a broader element to all this".


"Management considered this to be an aberration, but I think you'll see similar results in form and structure, just the magnitude will be smaller."

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