Bernanke Says Accommodative Policy Needed for ‘Uneven’ Economic Recovery
“The economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed,” Bernanke said today in a speech to a conference in Atlanta. At the same time, the Fed “will take whatever actions are necessary to keep inflation well controlled,” he said.
Recent data showing weakness in the economy, including a rise in the unemployment rate to 9.1 percent in May, have increased the odds the Fed will hold the benchmark interest rate near zero into next year. Bernanke said growth is likely to pick up in the second half of the year as fuel prices recede and disruptions of parts supplies dissipate as factories in Japan recover from an earthquake and tsunami.
“Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.”
Treasury two-year note yields dropped two basis points, or 0.02 percentage point, to 0.4 percent at 4 p.m. in New York, the lowest level this year. The dollar fell against most of its major counterparts, with the yen reaching the strongest level against the greenback in a month. The Standard & Poor’s 500 Index fell 0.1 percent to 1,284.94 after rallying as much as 0.8 percent.
“He’s saying monetary policy is on course and right on, and there’s no need to change at this point,” said Sung Won Sohn, an economics professor at California State University- Channel Islands and former chief economist at Wells Fargo & Co. “The implication is not only will there be no change, but a third round of quantitative easing is not likely to come.”
Bernanke said in April that the Fed would keep its balance sheet at a record level after ending a program to buy $600 billion in Treasuries, a policy known as quantitative easing, on schedule this month.
While a recent increase in inflation is a “concern,” Bernanke said today he doesn’t see “much evidence that inflation is becoming broad-based or ingrained in our economy.”
Still, “the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability,” he said.
The personal consumption expenditures price index, minus food and energy, rose 1 percent for the 12 months ending April. That’s below the longer-run inflation goal of 1.7 percent to 2 percent for the PCE index forecast by policy makers in April.
The breakeven rate for five-year Treasury Inflation Protected Securities, the yield difference between the inflation-linked debt and comparable maturity Treasuries, has fallen to 2.05 percentage points from 2.47 percentage points on April 29.
Breakeven rates are a measure of the outlook for consumer prices over the life of the securities. The measure has climbed from 1.24 points on Aug. 27, the day Bernanke signaled the Fed might embark on a second round of large-scale asset purchases during a speech in Jackson Hole, Wyoming,.
If commodity prices stabilize, “the upward impetus to overall price inflation will wane and the recent increase in inflation will prove transitory,” Bernanke, 57, said in today’s speech. Inflation is being restrained by “the stability of longer-term inflation expectations” and “weak demand for labor,” he said.
‘Loss of Momentum’
Bernanke said recent data on the labor market show a “loss of momentum.” He cited last week’s payrolls report, which showed that companies added 83,000 workers, down from 268,000 the month before.
Households are facing “significant headwinds,” he said, such as higher prices for food and energy, declining home values and still-high unemployment.
Oil prices have climbed 160 percent since February 2009, while non-fuel commodity prices gained about 80 percent, Bernanke said. The increase in commodity prices reflects “strong gains in global demand that have not been met with commensurate increases in supply,” Bernanke said.
The chairman rejected criticism that the Fed’s actions have pushed down the foreign exchange value of the dollar, and thereby boosted the price of commodities, saying “many factors other than monetary policy affect the value of the dollar.”
Commodities as tracked by the 24-member Standard & Poor’s GSCI Spot Index have rallied about 9 percent this year, led by gasoil and Brent crude.
Bernanke said the central bank’s efforts to keep inflation low and stable are helping the dollar.
“There is a very strong case that what the Fed needs to do to provide good fundamentals for the dollar in the medium term is to first keep inflation low and stable, and secondly to help the economy recover and be strong,” he said in response to questions after the speech.
Waning fiscal stimulus will also exert drag on growth, Bernanke said. He warned against sharp cutbacks at a time when the recovery is still fragile, while urging lawmakers to develop a long-term plan for deficit reduction.
The chairman also said the Fed needs to do “more thinking” about how new rules requiring banks to hold more liquidity will affect the broader financial system, and that the central bank wants to create new regulations that won’t “unnecessarily constrict credit.”
Policy makers have few options left to respond to accumulating signs of a slowdown after their second round of asset purchases sparked the harshest political backlash against the central bank in three decades.
“We’ve gotten inconsistency, hesitancy and unevenness” in U.S. economic growth, Atlanta Fed President Dennis Lockhart said today in a speech in Charlotte, North Carolina. “I’m troubled by what you might describe as a lack of conviction in this economy.”
Two regional Fed bank presidents critical of the so-called quantitative easing program -- Richard Fisher of Dallas and Charles Plosser of Philadelphia -- reiterated their opposition to additional stimulus in comments yesterday.
The central bank has “done enough if not too much” to spur growth, Fisher said in New York, while Plosser said in Helsinki that an exit from stimulus should start “long before” a recovery in the U.S. job market is assured.
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