U.S. "close to faltering" Fed ready to act: Bernanke
Wednesday, October 05, 2011
U.S. "close to faltering," Fed ready to act:
Bernanke
By: Pedro da Costa and Mark Felsenthal
WASHINGTON (Reuters) - The Federal Reserve is prepared to take
further steps to help an economy that is "close to faltering," Fed
chairman Ben Bernanke said on Tuesday in his bleakest assessment
yet of the fragile U.S. recovery.
Citing anemic employment, depressed confidence, and financial
risks from Europe, Bernanke urged lawmakers not to cut spending too
quickly in the short term even as they grapple with trimming the
long-run budget deficit.
He made clear that the U.S. central bank's policy committee
considers inflationary pressures well under control and given high
unemployment, would be ready to ease monetary conditions further
following the launch of a new stimulus measure in September.
"The Committee will continue to closely monitor economic
developments and is prepared to take further action as appropriate
to promote a stronger economic recovery in the context of price
stability," Bernanke told the Joint Economic Committee of
Congress.
His language was firmer than the policy-setting Federal Open
Market Committee's statement less than two weeks ago, when the Fed
said it would monitor the outlook and was "prepared to employ its
tools as appropriate."
Since then, uncertainty about the outcome of the euro zone's
sovereign debt crisis has undermined U.S. business and consumer
confidence and helped to slow economic growth. The business cycle
monitoring group ECRI last Friday said that the U.S. economy is
tipping into a new recession.
Asked whether another round of bond purchases, known as
quantitative easing, was in store, Bernanke was noncommittal.
"We never take anything off the table because we don't know
where the economy is going to go. We have no immediate plans to do
anything like that," he said.
The prospect of further Fed support for the economy lifted U.S.
stocks though, after the market saw selling early in the day,
pushing the S&P 500 briefly dipping into bear market
territory.
Andrew Tilton, economist at Goldman Sachs, said contagion from
the European crisis is a serious risk, threatening to tighten
credit availability in the United States and weaken exports to the
region. "This impact is likely to slow the U.S. economy to the edge
of recession by early 2012," he said.
Recent U.S. economic data has been mixed after a dismal August,
with a key manufacturing survey showing an unexpected improvement,
but the slightly better tone has not been sufficient to dispel
fears of another downturn.
Fresh clarity on the state of the economy will come on Friday,
when the Labor Department releases monthly employment figures.
Economists in a Reuters poll forecast a paltry gain of 60,000 jobs
for September, and Bernanke in his testimony offered little hope
for much improvement.
"Recent indicators, including new claims for unemployment
insurance and surveys of hiring plans, point to the likelihood of
more sluggish job growth in the period ahead," he told the Joint
Economic Committee of Congress.
FISCAL WARNING
Bernanke said government belt-tightening was likely to prove a
significant drag on the world's largest economy, which averaged
less than 1.0 percent annualized growth in the first half of the
year.
"An important objective is to avoid fiscal actions that could
impede the ongoing economic recovery," he said,
Stressing that higher inflation earlier in the year had not
become ingrained in the economy, Bernanke argued price pressures
will remain subdued for the foreseeable future.
That backdrop made it easier for the Fed to launch its latest
monetary easing effort in September, when it announced it would be
selling $400 billion in short-term Treasuries and using the
proceeds to buy longer-dated ones.
Bernanke estimated the new policy would lower long-term interest
rates by about 0.20 percentage point which he said was roughly
equivalent to a half percentage point reduction in the benchmark
federal funds rate. Already 10-year Treasury note yields are at
multi-year lows of 1.83 percent, helping keep mortgage and
corporate borrowing costs extraordinarily cheap.
"We think this is a meaningful but not an enormous support to
the economy. I think it provides some additional monetary
accommodation, it should help somewhat on job creation and growth.
It's particularly important now the economy is close -- the
recovery is close -- to faltering," Bernanke said.
"We need to make sure that the recovery continues and doesn't
drop back and the unemployment rate continues to fall
downward."
INFLATION VS JOBS
Republican lawmakers pressed Bernanke on whether the Fed's dual
mandate for full employment and price stability meant that it had
to make compromises on inflation. On the 2012 presidential campaign
trail, Republican candidate, Texas Governor Rick Perry earlier said
it would be "treasonous" for the Fed to add further money to the
economy.
Bernanke was categorical in defending the Fed's record of price
stability in recent decades. He noted inflation has averaged 2.0
percent during his tenure and blamed regulatory failures, not
excessively low rates, for the financial crisis.
Some economists believe the central bank could announce more
concrete targets for policy goals, by linking the path of rates
directly to unemployment and or inflation.
In response to the financial crisis and recession of 2008-2009,
the Fed slashed interest rates to effectively zero and more than
tripled the size of its balance sheet to a record $2.9 trillion,
buying bonds off banks balance sheets. Bernanke said this was not
bailing out Wall Street, but was part of its mandate to provide
price and financial stability.