U.S. crude oil futures continued a seven-session streak of new record highs on Tuesday, breaking through the previous $126.41 high and reaching an intraday high of $126.89. Meanwhile, heating oil broke though a new record, reaching $3.6685. Earlier on Tuesday, Fars News Agency reported that President Mahmoud Ahmadinejad was considering cutting output. Iran is the fourth largest oil supplier.

Speaking at the Atlanta Fed's Financial Markets Conference, Federal Reserve Chairman Ben Bernanke addressed the current state of the U.S. economy, calling current financial market conditions "far from normal." Nevertheless, he acknowledged that recent measures from the Fed have had some positive effects, although the fundamental strains took time to address.

Bernanke also said that he will take some time to consider how to best approach the fundamental strains on financial markets, and that the Fed will stop taking extraordinary measures as markets return to normalcy. He also added that the Fed stood ready to increase Term Auction Facility (TAF) auctions as warranted.

Monetary policy has been appropriate for reviving economic growth while sticking with the dual mandate to also fight inflation, said San Francisco Fed President Janet Yellen on Tuesday. Yellen also said markets are "far from normal" at present but she sees "rays of hope" that current strains may be easing. Under the current strain, Yellen said the level of monetary accommodation is appropriate and, together with the fiscal package, should be "sufficient to promote a gradual step up to moderate economic growth later this year."

She said the Fed's liquidity measures and accommodative rate cuts have mitigated the worst effects of the credit crunch, but they have yet to resolve it. "Indeed, my sense is that the process of resolution will unfold gradually," she said.

At the same time, Dallas Federal Reserve President Richard Fisher (voter), speaking at the Hilton Midland Plaza in Texas, said that the current economic slowdown will be prolonged, but not very deep.

Fisher warned the Federal Reserve is in a difficult situation trying to repair the financial system, and that inflation may even be higher when the economy emerges from the slowdown. He added that the inflation in emerging markets would also impact the U.S. economy.

Also speaking simultaneously with Yellen and Fisher, Kansas City Fed President Thomas Hoenig (non-voter) said inflation rates in the United States are at unacceptable levels. Consequently, the Fed's next challenge will be deciding when to shift its focus to fighting inflation, and consumers might have to get used to the fact that inflation could become a "way of life," he added. Hoenig acknowledged that the U.S. economy was facing a difficult set of circumstances, with prospects for a slow recovery. However, with financial markets beginning to show some signs of recovery, he argued that as the credit crisis eased, falling housing costs and persisting high oil prices would continue.

Speaking in an interview with the Wall Street Journal, Minneapolis Fed President Gary Stern (voter) said he did not think the U.S. economy would avoid a recession.

"There are recessions and then there recessions," he said. "The previous two were short, and the most recent one was not only short but shallow. I think that's what really matters to people. The average resident doesn't distinguish between whether the economy is growing half a percent or one and a half percent. That's not their interest. It's more, how does this feel? Are conditions generally improving noticeably or aren't they?"

In term of economic data, U.S. retail sales declined in line with expectations in April, according to a report from the Commerce Department, which saw a 0.2% month-over-month decline in sales following the previous month's unrevised flat report. The year-over-year rise in total retail sales is 2.6%. Excluding automobiles, retail sales rose 0.5% after rising by a revised 0.4% in March, previously reported as a 0.1% rise. Compared to a year ago, retail sales excluding autos have increased by 4.6%.

Retail sales excluding autos and gas rose by 0.6% compared to the previous month's 0.2% rise. From a year before, retail sales excluding autos and gas sales have advanced by 2.8%. Excluding food services, retail sales declined by 0.3% following a 0.2% rise in the previous month.

Earlier on Tuesday, the International Council of Shopping Centers (ICSC) pointed out that consumers faced yet another record week of oil prices at the pump in the week ending May 10, contributing to a week-over-week decline in retail sales across the nation. Meanwhile, Redbook retail sales showed some advance on a year-over-year basis. On a weekly basis, sales decreased by 1.0% in the ICSC report, following a 0.2% decline in the previous week's study, although sales on a year-over-year basis have advanced by 0.5%.

Meanwhile, the Johnson Redbook Retail Sales Index, which measures 9,000 retail units, showed a 2.0% advance when compared to the same week last year. This is better than the 1.4% annual advance recorded last week.

Import prices continued to soar in April, according to data from the U.S. Bureau of Labor Statistics (BLS) on Tuesday, which showed a 1.1% month-over-month increase in import prices excluding petroleum products and a 6.2% annual gain. In March, the import price index excluding petroleum rose 1.1% month-over-month and 5.4% year-over-year.

Meanwhile, headline import prices rose 1.8% month-over-month in April, above the consensus for a 1.6% increase and below the previous month's 2.9% gain. Annual import prices showed a pick-up of 15.4%, above the consensus forecasts for a 15.0% increase after prices rose an annual 14.8% in March. The BLS also reported a 1.0% month-over-month increase in import prices excluding fuels, compared to March's 1.0% increase.

According to the U.S. Commerce Department on Tuesday, business inventories picked up 0.1% month-over-month in March, compared to the consensus for a 0.4% increase and the revised 0.5% gain in February. Prior to revisions, business inventories had risen 0.1% month-over-month.

The U.S. consumer confidence report from IBD/TIPP was delayed until May 20.

The second-quarter Survey of Professional Forecasters, released by the Philadelphia Fed on Tuesday, sees the U.S. unemployment rate rising from 5.1% in this quarter to 5.5% by the end of the year.

In addition, a monthly reduction in nonfarm payrolls of 45,000 was forecasted this quarter. Headline inflation was forecasted for the second quarter at 3.5% while Core PCE is expected at 2.1% for the same time period in the report.

U.S. GDP was forecasted to increase 1.7% in the third quarter and increase 1.8% in the fourth quarter of 2008. There is also an expected 48% chance that 2008 year-over-year GDP will fall in the range of 1.0% to 1.9%.

The median home price fell by 7.7% in the first quarter, according to a report from the National Association of Realtors (NAR) on Tuesday, which also said the largest slowdown was in high-cost markets. In addition, there were only a small number of jumbo loan originations and higher foreclosures. Of the 149 metropolitan areas, 100 saw price declines, one was unchanged, and 48 showed higher prices in the first quarter compared to 2007 prices.

In Europe, policy-makers continued to discussion inflation pressure with Luxembourg Prime Minister Jean-Claude Juncker telling reporters in Brussels that inflation was a major concern and that it was important to avoid second-round inflation effects. Furthermore, Juncker, also the Finance Minister of Luxembourg, stated that financial markets had understood the G7's message regarding FX movements.

Furthermore, European Commissioner for Economic and Monetary Affairs Joaquin Almunia said that he was concerned about price pressures and expressed his hope that inflation would moderate in the second half of 2008. Almunia refused to comment on FX rates.

Belgian Finance Minister Didier Reynders said that the European Central Bank needs to balance its policy, adding that the central bank must promote growth as well as contain inflation. "They should have a more mixed monetary policy," Reynders said at a euro area finance ministers' meeting in Brussels on Tuesday.

In an effort to keep credit markets liquid, the Bank of Canada will auction another C$2.0 billion in a 28-day loan on May 15. The last such operation took place on May 1, when an identical operation drew an average yield of 3.02%. The operation will be conducted "as part of its continuing provision of liquidity in support of the efficient functioning of financial markets," read a press release on the central bank's website.

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