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Rising energy prices seen risk to U.S. economy

High energy prices in the wake of Hurricanes Rita and Katrina pose a risk to U.S. economic growth, but inflation expectations remain well-contained, a top White House economic adviser said on Sunday.
/ Source: Reuters

High energy prices in the wake of Hurricanes Rita and Katrina pose a risk to U.S. economic growth, but inflation expectations remain well-contained, a top White House economic adviser said on Sunday.

“The high energy prices are certainly burdening consumer budgets, they are burdening cost structures of firms and certainly continued increases in energy prices are a risk for economic growth going forward,” White House economic adviser Ben Bernanke told the Institute of International Finance annual membership meeting.

But Bernanke, who was governor of the Federal Reserve before he was named chairman of President George W. Bush’s Council of Economic Advisers in June, said low inflation expectations gave the Fed more flexibility than in past energy crises.

“A very important factor is the fact that inflation expectations are well-controlled and well-contained, which means that the Federal Reserve, unlike the 70s, doesn’t have to react violently in terms of raising interest rates to contain the second- and third-round inflationary impacts. So I remain pretty optimistic about the economy,” Bernanke said.

The Fed last week raised interest rates for the 11th time since June 2004 in a bid to head off concern about rising prices. However, there has been speculation the central bank may soon pause in its rate-hike campaign to assess the economic impact of the hurricanes.

Bernanke said the energy markets had been in the process of recovering from Hurricane Katrina when Rita hit.

“The early indications are that the impact on refineries and pipelines (of Hurricane Rita) has been less than we feared. It remains to be seen if there was significant damage to the offshore drilling platforms and so on,” he said.

“I remain optimistic that the impact on energy from these two events will be limited.”

Bernanke said the effects of the hurricanes on U.S. economic growth had so far been modest, but warned that job losses in September would be heavy and that the unemployment rate would climb a couple of tenths of a percentage point.

The jobless rate had dropped to a four-year low of 4.9 percent in August.

“There is of course the direct impact of the shutting down of the U.S. economy, the loss of several hundred thousand jobs at least, and reduced output production in the Gulf,” Bernanke said.

“(But) as the economy begins to recover, as jobs are returned and as the rebuilding process continues and strengthens over next two years or so, the effects on national GDP growth and job creation will actually be positive,” he said.

“Basically, I’m going to be very optimistic today about the ability of the U.S. economy to absorb these body blows, and my reason for that is that I think this is an extraordinary resilient and flexible economy.”