Danger of US downturn 'has faded'

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.

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.