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Harwick: Federal Reserve chairman Ben Bernanke on Monday signalled the central bank would act to strongly resist rising inflation, as energy costs soar.
Bernanke also played down a May surge in the unemployment rate from 5.1 per cent to 5.5 per cent, the biggest jump in 22 years, saying the risks of a substantial downturn in the US economy had receded.
His remarks suggest inflation is featuring more prominently on the Fed's radar screen, indicating policy-makers have little intention to cut interest rates further. Average gasoline prices in the United States have just surpassed $4 a gallon for the first time.
"The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations," Bern-anke said at a conference organised by the Boston Federal Reserve.
"The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilising for growth as well as for inflation," Bernanke said.
The dollar jumped to a three-month high against the yen and US Treasuries tumbled after Bernanke's remarks.
Bernanke's inflation warning, the third in just one week, seemed to bring him closer to the more inflation-leery faction of the policy-setting Federal Open Market Committee, led by the presidents of the Dallas and Philadelphia Federal Reserve Banks, Richard Fisher and Charles Plosser.
Fisher told CNBC on Monday that a weak dollar could lead to a vicious cycle of higher inflation and weaker growth.
Still, analysts have been sceptical that tough talk on price growth would be followed up with real action in the form of higher interest rates.
Rate futures have begun pricing in the prospect of a rate hike as early as October, but some are sceptical as to whether the Fed's warnings on the dollar and inflation have any teeth, particularly at time when banks continue to reel from bad investments in the mortgage sector.
Rosier on growth
For his part, Bernanke appeared relatively sanguine about the economic outlook, more so than he had been just a couple of months back. "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," he said
The speech also pointed to rising nervousness at the Fed over recent surges in oil prices, which have pushed crude oil reached a record over $139 a barrel last week.
US inflation rose 3.2 per cent in the 12 months to April, and by 2.1 per cent over the same period when volatile food and energy costs were excluded, according to the Fed's preferred inflation report, the government's data.
The Federal Open Market Committee next meets on June 24-25. Markets largely expect the Fed will not begin to raise interest rates until October.
Bernanke said inflation remains high, reflecting commodities price rises. At the same time, he said, higher raw materials costs have yet to translate to higher prices for products or the need to raise worker pay in response.
But the Fed chairman cautioned there is no guarantee this will remain the case. "The continuation of this pattern is not guaranteed, and future developments in this regard will bear close watching," he said.
Bernanke sounded a softer tone on worries about weak growth, saying that recent data had "only modestly" affected the Fed's view that the economy will regain strength later this year after a weak start.
US gross domestic product expanded at a weak 0.9 per cent annual rate in the first three months of the year, after a sluggish 0.6 per cent annual rate in the final quarter of last year, the effects of the bursting of the US housing bubble and a credit crunch triggered by a spike in mortgage delinquencies.
The economy still faces difficulties from the housing downturn and escalating energy costs, said Bernanke.
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