Higher energy prices ´manageable,´ Bernanke says -
Thursday, October 21, 2004 4:51:13 PM
afxpress.com
Higher energy prices 'manageable,' Bernanke says - UPDATE 1 WASHINGTON (AFX) -- The days of cheap oil are likely over, Federal Reserve Gov. Ben Bernanke said Thursday, but he expects the economic consequences of higher energy prices will be "manageable." Speaking at Dalton College in Albany, Ga., Bernanke said he believes the Fed will be able to maintain its "measured" pace of rate hikes, in part because inflationary expectations remain low
A copy of Bernanke's speech was made available in Washington. Markets will eventually adjust to higher energy prices, with consumers increasing efficiency and moving to other sources of energy, while producers will find new sources of petroleum and other forms of energy. But the adjustment will not be instantaneous
"The next few years may be stressful ones for energy consumers," he said. The immediate consequences are "unpleasant," he said
The rise in oil prices reflects fundamental facts about global supply and demand, not just speculation, Bernanke said. Global demand, especially from China but also from the industrialized nations, is rising faster than expected. Supplies, already tight and threatened with disruption by geopolitical and even meteorological events, have not been able to keep up
"The supply-demand fundamentals seem consistent with the view now taken by oil market participants that the days of persistently cheap oil are over," he said
For monetary policy, higher energy prices are a quandary, because they reduce output while increasing inflation. The Fed cannot target both problems at once. Output in the United States has likely been reduced by between 0.5 percent and 0.75 percent because of higher energy prices, he said. In the meantime, inflation has accelerated
The Fed's credibility as an inflation fighter is paying dividends now, Bernanke suggested. Because inflationary expectations remain low, "less urgency is required in responding," he said
The higher energy prices have sizable first-order effects on inflation, he acknowledged. But secondary inflationary effects are muted, he said, because firms and workers are not able to "pass on" the costs of higher prices in the form of higher prices or wage demands
Earlier in the summer, the Federal Open Market Committee concluded that much of the spike in inflation was due to "transitory" factors and that the committee could be "patient" in raising rates. "Thus far at least, the FOMC's diagnosis appears to have been correct, as both headline and core inflation have receded from the levels of last spring," Bernanke said
The FOMC won't be reacting directly to oil prices, but to the effects on output and inflation, he said. "Generally I expect those data to suggest that the removal of policy accommodation can proceed at a 'measured' pace," he said
Most analysts believe the FOMC will raise rates again at the Nov. 10 meeting and perhaps pause in December before pushing rates higher in the winter and spring quarters
The Fed's credibility must be maintained, Bernanke said. "Maintaining the public's confidence in its policies should thus be among the central bank's highest priorities," he said
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