June 9 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the economic outlook has improved from a month ago, and central bankers will ``strongly resist'' any waning of public confidence in stable prices.

``The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,'' Bernanke said in the text of prepared remarks to the Boston Federal Reserve's 52nd annual economic conference in Massachusetts. ``The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.''

The continued housing slump and higher energy prices are keeping risks tilted ``to the downside,'' while federal tax rebates, interest-rate cuts and record exports should underpin growth, he said.

Bernanke and his colleagues are aiming to prevent a deeper slowdown in an economy hampered by the collapse of the subprime mortgage market while avoiding a surge in inflation. They are voicing a commitment to low inflation even after cutting the benchmark interest rate to 2 percent this year in the most aggressive reductions in two decades.

The Fed faces a ``complicated balance'' of lowering interest rates to avert a recession ``without taking too much risk that underlying inflation is going to accelerate over time,'' New York Fed Bank President Timothy Geithner said today after a speech in New York.

The consumer price index rose 3.9 percent for the year ending in April, and expectations of inflation five years from now rose to 3.4 percent in May versus 3 percent in January, according to the Reuters/University of Michigan Survey. Crude oil prices are more than double the level of a year ago, and reached a record $139.12 on June 6.

Unemployment Rate

The unemployment rate rose to 5.5 percent in May, the most in more than two decades, as the U.S. lost jobs for a fifth month. Bernanke called the unemployment figures ``unwelcome.''

Fed officials have cut the benchmark lending rate to 2 percent from 5.25 percent in September. Traders see a 30 percent chance of a quarter-point increase as soon as August, up from 9 percent last week. Fed officials next meet on June 24-25. Investors see a 94 percent chance that the benchmark rate remains unchanged.

``Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities,'' Bernanke said. ``The pass through of high raw materials costs to the prices of most other products and to domestic labor costs has been limited, in part because of softening domestic demand.''

The ``poor recent record'' of commodity futures markets in predicting the course of future prices ``raises the question of whether policy makers should continue to use this source of information,'' he said.

Wide Variation

Wide variation in commodity prices implied by options suggests the forecasts ``of commodity prices obtained from futures markets, and consequently the forecasts of aggregate price inflation'' are ``highly uncertain,'' the Fed chairman said.

Bernanke spoke to more than a hundred attendees, including current and former central bankers, professors and Wall Street economists at a resort overlooking Pleasant Bay on Massachusetts' Cape Cod. The title of the conference is, ``Understanding Inflation and the Implications for Monetary Policy.''

The sessions mainly explore aspects of the Phillips Curve, a half-century-old economic theory that describes a trade-off between low unemployment and inflation.

Better Measures

``There is scope'' for economists to devise better measures of how much slack in labor and production exists in the economy at any given time, Bernanke said. Policy makers also face challenges in determining whether inflation trends are temporary or persistent, he said.

``Getting this distinction right has first-order implications for monetary policy,'' Bernanke said. ``Policy should be calibrated based on forecasts of medium-term inflation, which may differ from the current inflation rate.''

The Fed gathers indications about future inflation from surveys or from financial market signals of expected inflation.

``Much evidence suggests that expectations have become better anchored than they were a few decades ago,'' Bernanke said. ``They nonetheless remain imperfectly anchored.''

Officials also have only limited information on how businesses form expectations about inflation, he said.

The three-day conference closes June 11 with a panel discussion featuring Fed Vice Chairman Donald Kohn, European Central Bank executive board member Juergen Stark, Bank of Israel Governor Stanley Fischer and Lars Svensson, deputy governor of Sweden's central bank.

Other policy makers attending include Philadelphia Fed President Charles Plosser, Fed Governor Frederic Mishkin and Athanasios Orphanides, a former Fed Board research economist who is now a member of the ECB's governing council and head of the Central Bank of Cyprus.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Scott Lanman in Washington at .

Last Updated: June 9, 2008 20:18 EDT