Federal Reserve Chairman Ben S. Bernanke said rising wages will probably spur household spending in the next few quarters, even as weak job gains drag down consumer confidence.
While the U.S. has “a considerable way to go” for a full recovery, “rising demand from households and businesses should help sustain growth,” Bernanke said today in a speech in Charleston, South Carolina. “We are maintaining strong monetary policy support for the recovery,” he said in response to an audience question, without discussing any further action the Fed could take to aid growth.
The remarks signal Bernanke and his colleagues, when they meet in Washington next week, will stop short of making major changes in their policy statement or taking new steps to lower interest rates and reduce unemployment, said John Ryding, a former Fed researcher. Consumer spending, which accounts for about 70 percent of the economy, “seems likely to pick up in coming quarters from its recent modest pace,” Bernanke said.
“Further action still has a pretty high hurdle to get over,” said Ryding, co-founder and chief economist at RDQ Economics LLC in New York. “The status quo on policy remains.”
Fed policy makers are now starting to consider how to bolster the recovery and reduce unemployment after a year of developing tools to remove record monetary stimulus.
A report July 30 showed that the U.S. economy, recovering from the worst recession since the 1930s, slowed to a 2.4 percent annual rate in the second quarter, less than forecast, as a scarcity of jobs eroded consumer spending.
The economy “is now expanding at a moderate pace,” Bernanke said to the Southern Legislative Conference, a group of lawmakers from 15 states including Georgia, Texas and Virginia. “To be sure, notable restraints on the recovery persist,” including housing, commercial real estate and the labor market, he said.
A lesson from the Great Depression is that “we need to make sure that monetary policy continues to provide support the economy needs until we begin to see sustained growth and particularly growth in jobs,” Bernanke said in response to an audience question.
The Fed chief devoted most of the speech to current and long-term budget issues for state and local governments. States are cutting spending to close a combined $84 billion of budget deficits. The reductions are “weighing on economic activity,” Bernanke said.
Treasuries fell for the first time in four days as a report showed U.S. manufacturing expanded for a 12th-straight month, giving investors the confidence to seek higher returns than those available from government debt. The yield on the 10-year note climbed four basis points, or 0.04 percentage point, to 2.945 percent at 1:10 p.m. in New York, according to BGCantor Market Data.
Bernanke and the Fed’s Open Market Committee gather Aug. 10 in Washington to discuss interest rates and the economy.
Options outlined last month by Bernanke to aid growth and keep rates low include using communication to convey the path of borrowing costs, reduce the rate the Fed pays on excess reserves deposited with the central bank and expand the balance sheet through asset purchases. He didn’t discuss the options today.
The Fed signaled in June that Europe’s debt crisis may harm U.S. growth and repeated a pledge to keep interest rates near zero “for an extended period.” The central bank cut the benchmark interest rate almost to zero in December 2008 and turned to purchases of Treasury, housing-agency and mortgage- backed securities as the main tool of monetary policy.
The U.S. economy expanded at a 3.7 percent annual pace in the first quarter and 5 percent in the last three months of 2009, according to revised figures released July 30 by the government. Employers probably eliminated 63,000 jobs last month and the jobless rate may have climbed to 9.6 percent, the median estimates of analysts in a Bloomberg News survey for an Aug. 6 monthly Labor Department report.
Financial conditions “have become somewhat less supportive of economic growth in recent months,” Bernanke said, reiterating a point from the June FOMC statement. European officials’ aid for Greece and backstop financing, along with stress tests of the continent’s banks, “appear to have reduced concerns in financial markets about European prospects.”
In the U.S., “inflation has been low,” and the Fed expects it to “remain subdued over the next couple of years,” Bernanke said.
Economy Might Contract
Alan Greenspan, Bernanke’s predecessor as Fed chief from 1987 to 2006, said in an NBC interview broadcast yesterday that the slowing U.S. recovery feels like a “quasi-recession” and the economy might contract again if home prices decline.
Last week, St. Louis Fed President James Bullard said the central bank should resume purchases of Treasury securities if the economy slows and prices fall rather than maintain a pledge to keep rates near zero. “The U.S. is closer to a Japanese- style outcome today than at any time in recent history,” Bullard said, warning about the possibility of deflation.
Other Fed policy makers are skeptical about taking further action to bolster monetary stimulus. “Talk of new efforts to stimulate the economy are premature right now,” Philadelphia Fed President Charles Plosser said in a July 26 interview with Bloomberg News. “I don’t think the data have been sufficiently compelling one way or another.”
Dallas Fed President Richard Fisher told reporters last week that he doesn’t “see any deflationary net pressure.”
For state governments, while budgets will “probably remain under substantial pressure for a while,” revenue may increase in some states for fiscal 2011 and the municipal bond market “has remained reasonably receptive this year to most borrowers, with rates low and new issuance relatively solid,” Bernanke said.
In the longer term, states must deal with unfunded pension liabilities of as much as $2 trillion and a potential collective liability of $600 billion for retiree health benefits, Bernanke said.
“I don’t think these problems can be solved simply through across-the-board cuts in existing state programs,” Bernanke said. “Instead, states should intensively review the effectiveness of all of their programs and be willing to make significant changes to deliver necessary services at lower cost.”