Fed Governor Foresees Oil Prices Staying High
production capacity and rising worldwide demand will combine
to keep oil prices high, according to Ben Bernanke, a member
of the Federal Reserve Systems Board of Governors. However,
the long-term effects of high prices will be manageable, he
noted, and as long as core inflation remains low, the Feds
gradual removal of an accommodative monetary policy can proceed.
Making the adjustments
Conservation and the development of alternative energy
sources will, over the long term, take some sting out of higher
oil prices, he said in an October speech in Albany, Ga.
Moreover, productivity gains from diverse sources, including
technological improvements and a more highly educated workforce, are likely to exceed by a significant margin the productivity
losses created by high oil prices.
Bernanke also pointed out a possible bright side to higher
oil prices. For instance, he said, increased oil prices might
cause companies to invest in more energy-efficient buildings
and equipment, mitigating the decline in many companies capital
spending over the past several years. In addition, if high
oil prices are in part caused by heightened demand spurred
by worldwide economic growth, or if overseas oil suppliers
spend some of their increased revenue on U.S. products, U.S.
exports could benefit.
Accomplishing monetary policy goals
For monetary policymakers, high oil prices present a short-term challenge, Bernanke said, because increased petroleum costs slow economic growth and increase inflationary pressure. (This observation was also made by Fed Chairman Alan Greenspan in an earlier speech.) Bernanke likened the increase to the imposition of a tax on U.S. consumers, with the revenue from the tax going to oil producers abroad.
The Feds approach to adjusting monetary policy in the face
of foreseeably high oil prices requires balancing the goals
of low unemployment and low inflation. The Federal Open Market
Committee (FOMC) concluded that recent inflationary pressure
is transitory and that the core inflation rate will remain
low, he said. The FOMC is monitoring inflationary pressures
closely, he added, and will adjust policy decisions accordingly.