Federal Reserve Chairman Ben S. Bernanke said the central bank can take further steps to sustain a recovery that’s “close to faltering” and cautioned lawmakers against making changes in fiscal policy that harm growth.
The Fed can give more information about its pledge to keep interest rates low at least through mid-2013, reduce the rate paid on banks’ reserve deposits or buy more securities, Bernanke said today in testimony to Congress’s Joint Economic Committee in Washington, reiterating options he mentioned in July. He signaled that higher inflation this year won’t stop the Fed, saying it hasn’t become “ingrained” in the economy.
Bernanke is struggling to find ways to reduce unemployment stuck at 9 percent and avert a second recession in three years after deploying unconventional stimulus tools in August and September. Europe’s sovereign-debt crisis poses risks to growth already weak from housing and joblessness, the Fed chief said.
“We need to make sure that the recovery continues and doesn’t drop back and that the unemployment rate continues to fall downward,” Bernanke said in response to questions from Senator Bob Casey of Pennsylvania, the panel’s Democratic chairman.
They were Bernanke’s first detailed comments on the economic outlook and monetary policy since his decision Sept. 21 to adopt so-called Operation Twist, replacing $400 billion of Treasuries in the Fed’s portfolio with longer-term securities in a move aimed at further reducing borrowing costs and lowering unemployment.
‘Close to Faltering’
That action from the Fed, while not a “game changer,” is “particularly important now that the economy is, the recovery is close to faltering,” Bernanke said today. The central bank program should reduce long-term interest rates by about 0.2 percentage point, a move “roughly approximate” to a half-percentage-point cut in the benchmark federal funds rate, he said.
The central bank has kept that rate near zero since 2008 and purchased $2.3 trillion of housing and government debt. In August, the Fed pledged to maintain low interest rates through at least mid-2013, amending previous language for a less specific “extended period.”
The Fed “will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability,” Bernanke said in today’s testimony.
Bernanke, a former Princeton University economist, reiterated his comments from throughout 2011 that lawmakers shouldn’t adopt fiscal policies that harm the economy in the short term while adopting a long-term plan to reduce the federal budget deficit.
Lawmakers on the separate bipartisan congressional supercommittee charged with seeking $1.5 trillion in deficit reduction by Nov. 23 would take a “substantial step” by accomplishing that goal, Bernanke, 57, said. At the same time, “more will be needed to achieve fiscal sustainability,” he said.
“A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery,” Bernanke said. “Putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term,” he said, without being more specific.
Stocks pared losses after Bernanke’s comments. The Standard & Poor’s 500 Index fell 0.9 percent to 1,089.15 at 2:29 p.m. in New York after declining as much as 2.2 percent. The yield on the 10-year Treasury note rose three basis points to 1.80 percent. A basis point is 0.01 percentage point.
Responding to a question, Bernanke said the central bank has no immediate plans for another round of large-scale asset purchases, known as quantitative easing. At the same time, he said, the Fed doesn’t take “anything off the table.”
The U.S. jobless rate was 9.1 percent in August and has been stuck at 9 percent or higher for five months. Employers added zero jobs to payrolls in August, down from 85,000 in July, according to the Labor Department. Sustained payroll increases of around 150,000 a month are needed to bring unemployment down about half a percentage point over a year, according to Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
“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,” Bernanke said today. He also said that the “pattern of sluggish growth” in the economy “was particularly evident in the first half.”
The economy expanded at a 1.3 percent annual pace in the second quarter after a 0.4 percent rate in the first three months of the year, according to the Commerce Department. Analysts surveyed by Bloomberg last month projected a 1.8 percent rate of growth in the third quarter, based on the median estimate.
“The recovery from the crisis has been much less robust than we had hoped,” Bernanke said. Fed officials expect a “somewhat slower pace of economic growth over coming quarters” than they did in June, he said, without giving a specific forecast.
U.S. stocks last week finished their worst quarter since the financial panic of 2008, burdened by concerns over a potential Greek debt default and chances the U.S. will relapse into recession. The Standard & Poor’s 500 Index dropped 14 percent through Sept. 30.
Yields on 10-year Treasuries have risen from a record 1.67 percent on Sept. 23. Still, the difference between yields on 10-year and 30-year Treasuries has narrowed to less than 1 percentage point for the first time since July 2010.
In response to a question, Bernanke said the U.S. banking system has manageable exposure to European nations buffeted by the continent’s sovereign-debt crisis.
“We have looked very carefully at bank exposures both to foreign sovereigns and to foreign banks,” Bernanke said. “The exposures of U.S. banks to the most troubled sovereigns -- Portugal, Ireland and Greece -- is quite minimal. So the direct exposures there are not large.”
Bernanke said faster inflation this year “does not appear to have become ingrained in the economy” and cited a recent decline in what traders expect for inflation in five to 10 years. The FOMC said inflation “appears to have moderated since earlier in the year” as prices of energy and some commodities have fallen. The Fed’s preferred price index, which excludes food and fuel costs, rose 1.6 percent in August from a year earlier, up from 1 percent in March.
The housing market, which the Fed said is “depressed,” is showing little sign of rebounding even with a record-low average 4.01 percent interest rate on the 30-year fixed-rate mortgage. The annual pace of new-home sales in August was 295,000, just above the record-low rate of 278,000 in August 2010. That’s less than one-fourth of the 1.39 million pace in July 2005.
Housing, which had been a “significant driver of recovery from most recessions” in the U.S. since World War II, is now among industries contributing to the “slower-than-expected rate of expansion,” Bernanke said.