Bernanke Plays Down Deflation Risk

Federal Reserve Chairman Ben Bernanke says the danger of the US economy falling into Japanese style deflation is not significant, partly because the Federal Reserve will strongly resist it.

Speaking at the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole, Wyoming, Mr Bernanke said the Federal Reserve will strongly resist deviations from price stability in the downward direction.

"Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation.

"It is worthwhile to note that, if deflation risks were to increase, the benefit-cost tradeoffs of some of our policy tools could become significantly more favourable," he said.

Mr Bernanke said regardless of the risks of deflation, the Federal Reserve will do all that it can to ensure continuation of the economic recovery.

"Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability," he said.

Mr Bernanke said the pace of recovery in output and employment has slowed somewhat in recent months, in part because of slower-than-expected growth in consumer spending, as well as continued weakness in residential and nonresidential construction.

Despite this recent slowing, however, he said it was reasonable to expect some pickup in growth in 2011 and in subsequent years. Broad financial conditions, including monetary policy, were supportive of growth, and banks appeared to have become somewhat more willing to lend.

"Importantly, households may have made more progress than we had earlier thought in repairing their balance sheets, allowing them more flexibility to increase their spending as conditions improve.

"And as the expansion strengthens, firms should become more willing to hire. Inflation should remain subdued for some time, with low risks of either a significant increase or decrease from current levels," he said.

However Mr Bernanke cautioned that macroeconomic projections are "inherently uncertain," and the economy remains vulnerable to unexpected developments. Should further action prove necessary, policy options are available to provide additional stimulus, he said.

" Any deployment of these options requires a careful comparison of benefit and cost. However, the Committee will certainly use its tools as needed to maintain price stability--avoiding excessive inflation or further disinflation--and to promote the continuation of the economic recovery.

"We have come a long way, but there is still some way to travel," he said.

(C) NewsRoom America 2010