Bernanke: U.S. not facing 1970s-style stagflation

By David Lawder

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Thursday the United States was not headed toward 1970s-style "stagflation" but acknowledged inflation could complicate the central bank's effort to spur the economy.

"I don't anticipate stagflation," Bernanke told the Senate Banking Committee, referring to the painful mix of economic stagnation and spiraling inflation the economy suffered three decades ago. "I don't think we're anywhere near the situation that prevailed in the 1970s."

In a second day of testimony on the Fed's semiannual economic report, Bernanke said current price pressures reflected strong global demand for oil, metals and food, and said the cost of these commodities should stabilize in coming months.

"If that's the case, then inflation should come down and we'd have, therefore, the ability to respond to what is both a slowdown in growth and a significant problem in financial markets," he said.

The U.S. central bank has cut its target for overnight interest rates by 2.25 percentage points to 3 percent since mid-September in an effort to put a floor under an economy widely seen at risk of falling into recession.

While the Fed is widely expected to lower rates further, surprisingly high inflation readings have fueled concern the central bank might go too far in its effort to spur growth.

"While it is difficult to see our nation's economy experience minimal growth, the consequences of failing to restrain inflation would be far more painful and far more difficult to unwind," warned Sen. Richard Shelby of Alabama, the committee's top Republican.

Even as Bernanke spoke, U.S. crude oil futures surged to an all-time high of $102.74, breaking the inflation-adjusted peak of $102.53 reached in 1980.