Bernanke: Mideast Threat to US Economy Is Mild -- For Now

The spike in fuel prices, sparked by Mideast turmoil, currently poses only a mild threat of broader inflation because the ailing U.S. jobs market has kept a lid on wages, Federal Reserve Chairman Ben Bernanke told Congress today.

But a continuing rise in the prices of oil and other commodities like steel, cotton and food could threaten both the economic recovery and stability for the cost of daily life for most Americans, Bernanke said.

"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," Bernanke said in his semiannual testimony on monetary policy before the Senate Banking Committee.

"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 Fed's forecasts, he 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," Bernanke said.

That notification of Fed vigilance came amid a broader economic view that echoed much of what Bernanke has already been saying this year.

The U.S. economy seems to be recovering at a more sustainable pace thanks to rising consumer and business spending, but the housing market is still very weak and the labor market remains terrible, especially for the millions of Americans who lost their job in the wake of the financial crisis and recession, he said.

"Following the loss of about eight and three-quarter million jobs from early 2008 through 2009, private-sector employment expanded by only a little more than 1 million during 2010, a gain barely sufficient to accommodate the inflow of recent graduates and other entrants to the labor force," Bernanke said.

"We do see some grounds for optimism about the job market over the next few quarters, including notable declines in the unemployment rate in December and January, a drop in new claims for unemployment insurance and an improvement in firms' hiring plans," he added. "Even so, if the rate of economic growth remains moderate, as projected, it could be several years before the unemployment rate has returned to a more normal level."

Bernanke, to his obvious chagrin, was also pressed by senators to weigh in on a House Republican budget bill that would cut $100 billion in spending in the next fiscal year and $61 billion before the end of 2011.

Several Democrats asked him about two analyses of the bill by Goldman Sachs and Moody's Analytics, which projected the effects on the economy could include the loss of 700,000 jobs and a 2 percent decline in gross domestic product -- the total revenue of goods and services produced within the United States.

Bernanke said the Fed's own projections for the bill weren't as bad. He said he couldn't remember how many jobs would be lost according to Fed forecasts for the bill, but that it probably wouldn't reduce GDP by more than several tenths of a percentage point.

He acknowledged, though, that the Republicans' spending cuts would "to some extent" counteract the Fed's efforts to stimulate economic growth and nurture a sustainable recovery.