Page last updated at 03:52 GMT, Tuesday, 10 June 2008 04:52 UK

Risk of US downturn 'diminishes'

Jobseekers at a jobs fair in California. File photo
May saw the biggest jump in unemployment in over 20 years

The US economy may have avoided a major decline, US Federal Reserve Chairman Ben Bernanke has said.

Mr Bernanke said the risk of a substantial downturn had "diminished over the past month or so".

Playing down recent unemployment rises, he said a series of interest rate reductions combined with tax cuts was helping the US offset its difficulties.

Earlier, Democratic presidential candidate Barack Obama attacked his rival John McCain's economic policies.

In his first speech since Hillary Clinton left the presidential race, Mr Obama accused Mr McCain, the Republican party's candidate, of "a full-throated endorsement" of President George W Bush's economic policies.

The McCain camp responded by saying that measures Mr Obama was proposing would weaken the US economy.

Inflation fears

Mr Bernanke gave his assessment of how the US economy was faring at a bankers' conference in Chatham, Massachusetts.

He said that "the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so".

He added that despite a recent rise in unemployment, which last month saw its biggest jump in 20 years, a series of reductions in interests rates in the last nine months combined with tax cuts had helped to offset the risks threatening the economy.

Mr Bernanke did say, however, that rising energy prices - which saw the cost of oil hit a record high on Friday - risked pushing up inflation.

US Federal Reserve Chairman Ben Bernanke. File photo
Mr Bernanke said recent rate reductions and tax cuts had helped

"The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations," he said.

If consumers and businesses believe the record oil prices will continue to rise, they could change their spending habits to make inflation a self-fulfilling prophecy, says the BBC's Jane O'Brien in Washington.

That, and a weak dollar, our correspondent added, could force the Fed to raise rates later this year or next, though Mr Bernanke said that the Fed would be robust in dealing with this issue.

"The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilising for growth as well as for inflation," Mr Bernanke said.

Our correspondent says that there has been progress in repairing the credit markets that sparked the US housing slump, the Fed has made swingeing interest rate cuts and the government is spending $168bn on top of tax rebates to help stimulate recovery.

But last week's jump in unemployment rates and record fuel prices rocked already jittery markets, our correspondent says, and for the average American, Mr Bernanke's soothing words may seem hard to believe.

'Different vision'

Polls indicate that the economy has surpassed the war in Iraq as the biggest concern for American voters.

Barack Obama attacks John McCain on the economy

Mr Obama hopes that focusing on the economy will persuade undecided voters to support him, correspondents say.

Speaking in Raleigh, North Carolina, Mr Obama launched his Change That Works for You tour - a nationwide schedule of speeches focusing on the economy.

"When it comes to the economy, John McCain and I have a fundamentally different vision of where to take the country, because for all of his talk about independence, the centrepiece of John McCain's economic plan amounts to a full-throated endorsement of George Bush's policies.

"I have a different vision for the future. Instead of spending $12bn a month rebuilding Iraq, I think it's time we invested in our roads and schools and bridges."

Mr Obama pledged "an immediate $50bn" to those hardest hit by the US "downturn".

He also accused Mr McCain of doing nothing to help 1.5m people facing foreclosures across America, "even as he [Mr McCain] supported spending billions to bail out Wall Street".

He promised to introduce a windfall tax on the profits of American oil companies.

The McCain camp hit back by portraying Mr Obama as a tax-and-spend liberal.

"While hardworking families are hurting and employers are vulnerable, Barack Obama has promised higher income taxes, social security taxes, capital gains taxes, dividend taxes, and tax hikes on job creating businesses," campaign spokesman Tucker Bounds said.

On Monday, Mr McCain was holding fundraising events in Virginia and in the capital, Washington.


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