Fed official downplays rising prices

WASHINGTON --Rising oil prices will weigh on economic growth, but the increases so far will not derail the expansion and need not fuel troubling inflation, Federal Reserve Board Governor Ben Bernanke said yesterday.

"There's going to be a little bit of a slowdown effect . . . but at the current levels, anyway, I think it won't derail what looks like a self-sustaining expansion at this point," Bernanke said in an interview with the public television program Nightly Business Report.

Bernanke described current US monetary policy, with overnight borrowing costs at 1.5 percent and the central bank on a "measured" course of rate increases, as "very accommodative" and said risks appeared balanced between the potential for a pickup in inflation and slowing growth.

When Fed officials raised interest rates a quarter-percentage point just under two weeks ago, they said the economy appeared poised for an acceleration after a soft patch brought about in good measure by high energy prices.

Oil prices have gained further since then, although a rally that took US crude up to a record $48.70 late last week has fizzled. US crude settled at $46.05 yesterday.

Bernanke said rising oil prices presented a "very tough call" for central bankers, because energy price gains not only slow growth but push up inflation. He said the central bank would have a much freer hand if oil price increases did not end up feeding so-called second-round inflation effects.

"If inflation is low and stable and people believe it will be low and stable, an increase in oil prices will create, of course, a transitory burst in inflation," Bernanke said. "But as long as it doesn't get embedded into wage demands and prices, it won't necessarily create a longer-term increase in inflation."

The latest run-up in oil prices has led some economists to scale back their forecasts for US economic growth and warn that a soft patch the economy hit in the second quarter as consumers retrenched could prove prolonged.