Bernanke Says Fed Is Prepared to Act as Needed
Ben S Bernanke, chairman of the U.S. Federal Reserve. Photographer: Joshua Roberts/Bloomberg
July 21 (Bloomberg) -- Al Broaddus, former president of the Federal Reserve Bank of Richmond, talks about today's testimony by Federal Reserve Chairman Ben S. Bernanke before the Senate Banking Committee. (This is an excerpt of the full interview. Source: Bloomberg)
July 21 (Bloomberg) -- Dino Kos, managing director at Portales Partners LLC, talks about Federal Reserve Chairman Ben S. Bernanke's testimony today before the Senate Banking Committee. In his eight-page statement to the committee, Bernanke devoted almost 10 times as many words to discussing the exit from stimulus as he did to potential actions to boost growth. Kos talks with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)
Federal Reserve Chairman Ben S. Bernanke said central bankers “remain prepared” to act as needed to aid growth even as they get ready to eventually raise interest rates from almost zero and shrink a record balance sheet.
While Fed officials plan for the exit, “we also recognize that the economic outlook remains unusually uncertain,” Bernanke said today in testimony to the Senate Banking Committee. “We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.”
Bernanke, responding to questions, outlined options for further steps, including giving more information on the Fed’s commitment to low interest rates, and he said officials haven’t decided which tools they might use. Economic data over the past month that were weaker than analysts projected have prompted investor speculation that the Fed may increase monetary stimulus in a bid to keep the economy growing.
Stocks fell and Treasuries climbed after Bernanke’s testimony. The Standard & Poor’s 500 Index slid 1.3 percent to 1,069.59 at the 4 p.m. p.m. close of trading in New York. Yields on two-year Treasuries fell to a record 0.5520 percent.
“The Fed is not close to implementing additional stimulus,” Dean Maki, chief U.S. economist at Barclays Capital in New York, said in a telephone interview. Expectations for additional steps were based on “more hope than fact.”
Bullets Remain
Tools to boost the economy also include reducing the rate paid on banks’ reserves held at the Fed and using the central bank’s balance sheet, Bernanke said. Asked by Republican Senator Jim Bunning of Kentucky if the Fed is “out of bullets,” Bernanke responded:
“I don’t think so. We need to continue to evaluate those options. As I said, we’re not prepared to take any specific steps in the near term, particularly since we’re still also evaluating the recovery, the strength of the recovery. But I do think that there is some potential for some of those steps to be effective.”
The average growth in private payrolls of 100,000 a month this year is “insufficient to reduce the unemployment rate materially,” and it will probably take a “significant amount of time” to restore the almost 8.5 million jobs lost in 2008 and 2009, Bernanke said in his prepared remarks.
Growth, Unemployment
At the same time, Fed policy makers “expect continued moderate growth, a gradual decline in the unemployment rate and subdued inflation over the next several years,” Bernanke said. Business investment in equipment and software “appears to have increased rapidly” in the first half, and “stronger exports” have aided U.S. manufacturing growth, he said.
In his eight-page statement to the committee, Bernanke devoted almost 10 times as many words to discussing the exit from stimulus as he did to potential actions to boost growth. Exit options include reinvesting proceeds from maturing Treasuries into shorter-term issues, selling housing debt and raising the interest rate paid on the $1 trillion of bank deposits at the Fed, Bernanke said.
The Fed chief said the Dodd-Frank financial regulatory overhaul signed into law earlier today by President Barack Obama, “together with stronger regulatory standards for bank capital and liquidity now being developed, will place our financial system on a sounder foundation and minimize the risk of a repetition of the devastating events of the past three years.”
Signing Ceremony
The Washington signing ceremony, attended by Senate Banking Committee Chairman Christopher Dodd and House Financial Services Committee Chairman Barney Frank, delayed the hearing’s original 10 a.m. scheduled start by four hours. Bernanke is scheduled to testify tomorrow before the House Financial Services Committee.
Last month, Bernanke and his colleagues on the Fed’s Open Market Committee reiterated their commitment to keep the benchmark rate close to zero for an “extended period” to help the economy recover from the worst financial crisis and downturn since the 1930s.
At the same time, officials talked about the “need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably,” after “slightly softer” economic indicators recently and “less accommodative financial conditions,” according to minutes of the session, released July 14.
Stock Decline
The Standard & Poor’s 500 Index has declined about 12 percent from its 2010 peak on April 23 amid investor concern Greece might default on its debt and downgrades of other European nations’ credit ratings.
The Fed’s “somewhat weaker outlook” is due in part to financial markets that “have become less supportive of economic growth in recent months,” Bernanke said. European leaders have “put in place a number of strong measures” to aid Greece and other euro-area countries, he said.
Many banks still have “a large volume of troubled loans on their books, and bank lending standards remain tight,” Bernanke said.
Bernanke’s testimony included a 19-page addendum summarizing a series of more than 40 meetings the Fed has held this year to figure out how to reverse a decline in lending to small businesses. The section included a summary of recommendations from participants in the meetings.
The National Federation of Independent Business reported last week that confidence among small businesses fell in June to the lowest level in three months as their projections for profits, sales and economic conditions weakened.
Forecasts Trimmed
Fed policy makers trimmed their forecasts for U.S. growth and raised unemployment projections at their June 22-23 meeting. For 2011, officials expect growth ranging from 3.5 percent to 4.2 percent, down from 3.4 percent to 4.5 percent, and a fourth- quarter unemployment rate of 8.3 percent to 8.7 percent, up from 8.1 percent to 8.5 percent.
“The forecasts are qualitatively similar to those we released in February and May,” even as unemployment will decline more slowly and near-term inflation will be “a little lower,” Bernanke said.
Growth in U.S. gross domestic product slowed to a 2.7 percent annual pace in the first quarter, compared with a 3 percent estimate issued in May and a 5.6 percent rate in the last three months of 2009.
Estimates Cut
Economists at Goldman Sachs Group Inc. last week reduced their estimate of second-quarter growth to a 2 percent annual pace from 3 percent after data showed the U.S. trade gap widened in May to an 18-month high while retail sales fell for a second straight month. JPMorgan Chase & Co. analysts reduced their projection of growth in the second half by 0.5 percentage point to 2.75 percent.
U.S. factory output fell 0.4 percent in June, the most in a year, a Fed report showed July 15. Yesterday, government figures showed housing starts declined in June to the lowest level in eight months after the expiration of a U.S. government tax incentive caused sales to slump.
Private employers added fewer workers to payrolls in June than economists forecast. The jobless rate has been stuck at 9.5 percent or higher since August and reached 10.1 percent in October, compared with December 1982’s 10.8 percent. It may take as long as five or six years for unemployment to return to its longer-run rate, which Fed officials judge to be 5 percent to 5.3 percent, the central bank said in its meeting minutes.
Inflation
Meantime, inflation is running below Fed officials’ long- term preferred rate of about 1.7 percent to 2 percent. The core personal consumption expenditures price index, which excludes food and fuel, rose 1.3 percent in May from a year earlier.
“By a number of measures underlying inflation has trended down over the past two years,” Bernanke said without discussing the chance of deflation.
International Business Machines Corp., the world’s biggest computer-services company, said this week sales last quarter rose 2 percent to $23.7 billion, trailing the average analyst estimate of $24.2 billion, as demand for services slowed and the falling euro weighed on revenue.
To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net.
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