Bernanke: Inflation risk ‘modest’

NEW YORK (CNNMoney) — In his twice yearly testimony to Congress Tuesday, Federal Reserve Chairman Ben Bernanke acknowledged surging oil and food prices, but downplayed them as a significant threat to the economy.

Speaking before the Senate Banking Committee, Bernanke noted that rising commodity prices will likely be passed on to consumers, but only modestly. The Fed projects inflation of less than 2% for each of the next three years.

“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,” he said.

But he acknowledged that if higher prices persist, inflation could become a serious risk: “Sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability,” he said.

In his prepared testimony, Bernanke also defended the Fed’s latest controversial methods of stimulating the economy.

In November, the Fed decided to embark on its second round of so-called quantitative easing, dubbed QE2, which is meant to boost business activity and consumer spending by keeping interest rates low and injecting $75 billion into the U.S. economy each month.

But he has recently come under fire for the policy, as critics argue it could boost longterm inflation. Now that energy and food prices are rallying, the pressure on Bernanke has only intensified.

But on Tuesday, he repeated his claims that a wide range of market indicators support the view that the Fed’s recent actions have been effective.

“We have all the tools we need” for “a smooth and effective exit at the appropriate time,” said Bernanke, adding that the central bank is also ready and able to tighten monetary policy when needed.

When it comes to employment, the Fed chairman noted that the one million jobs established since the recovery began were barely enough to accommodate the inflow of recent graduates and other entrants to the labor force.

“Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established,” he said.

The Fed chairman traditionally speaks before Congress twice a year, defending the central bank’s latest policies, in a formal testimony formerly known as the Humphrey-Hawkins reports.

— CNN Senior Producer Scott Spoerry contributed to this report. 

First Published: March 1, 2011: 10:29 AM ET