Bernanke warns on protectionism

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Ben Bernanke, the Federal Reserve chairman, issued a strong warning yesterday against the spread of protectionism - but in a major policy speech steered carefully clear of giving any pointer on the future course of the US economy and interest rates.

"Further progress in global economic integration should not be taken for granted," Mr Bernanke told policymakers and academics at the traditional economics conference sponsored each August in Jackson Hole, Wyoming, by the Federal Reserve Bank of Kansas City.

The Fed chairman, who took over from Alan Greenspan in February, highlighted the risks posed by international tensions in the Middle East and by terrorism, which were already holding back global economic integration, "and may do so even more in the future". But that uncertainty is only the latest threat to the growth of international trade and co-operation, after the effective collapse of the Doha round this summer, and mounting pressure in the US for measures to correct the country's huge trade deficit with China, and stem the loss of domestic jobs to emerging markets in Asia and elsewhere.

The natural reaction of people affected was to resist change, "for example, by seeking the passage of protectionist measures", Mr Bernanke said.

Policymakers had to respond by making sure that globalisation's benefits were properly shared, with action such as help for displaced workers to retrain, to take advantage of new opportunities. Last year, the overall US trade deficit hit a record $717bn (£380bn), with more than a quarter of the shortfall - $202bn - accounted for by China alone. The imbalance was the largest ever recorded between two countries.

Markets, however, took cautious heart from Mr Bernanke's failure to discuss the US economy, now at a delicate crossroads. If anything, traders took the omission to mean that the central bank is leaning away from an early resumption of the upward march in interest rates.

Amid multiplying signs of a cooling economy, Fed policymakers held the key short-term rate at 5.25 per cent on 8 August, after 17 successive quarter-point increases. This week brought evidence that the housing market, a vital prop to consumer spending, has stalled, with some experts warning of outright collapse.

New home sales dipped by 4.3 per cent in July from the preceding month, following a trend already set by existing homes. New home prices also dropped, by 1.7 per cent.

Peter Morici, business professor at the University of Maryland, said the economy was probably slowing more than anticipated by the central bank when it chose to hold rates where they were. Inflation was likely to remain high for another month or two, he warned, "but the temptation to raise interest rates could result in a terrible bout with stagflation, or recession".