Bernanke Says ‘Frustratingly Slow’ Recovery Warrants Accommodative Policy
Federal Reserve Chairman Ben S. Bernanke said the “frustratingly slow” U.S. recovery warrants sustained monetary stimulus while predicting that growth will gain speed in the second half of the year.
“The economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed,” Bernanke said yesterday in a speech in Atlanta. At the same time, the Fed “will take whatever actions are necessary to keep inflation well controlled,” he said.
Bernanke said consumer spending is being held back by an unemployment rate that rose to 9.1 percent last month, a drop in home values and tight credit. Growth is likely to pick up as fuel prices moderate and factory disruptions ease as Japanese parts suppliers recover from an earthquake and tsunami, he said. Stocks fell yesterday as some investors interpreted the comments as a signal that the Fed is unlikely to deploy a new round of bond purchases to bolster the economy.
“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.”
The Standard & Poor’s 500 Index fell 0.1 percent yesterday to 1,284.94 after rallying as much as 0.8 percent. Treasury two- year note yields dropped two basis points, or 0.02 percentage point, to 0.4 percent in New York, the lowest level this year. Today, the yield fell one basis point to 0.39 percent at 3:04 p.m. in New York.
“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,” Bernanke said.
Bernanke has spurred growth by holding the main interest rate near zero since December 2008 and expanding the Fed’s balance sheet to $2.79 trillion. The Federal Open Market Committee said in April it will complete a program to purchase $600 billion in bonds this month, a policy known as quantitative easing, and affirmed a pledge to keep interest rates low for an “extended period.”
History shows that recoveries take longer when they follow financial crises, according to the 2009 book “This Time Is Different: Eight Centuries of Financial Folly,” by economists Carmen Reinhart and Kenneth Rogoff. The authors traced similarities among crises in 66 countries dating back to Medieval times, including government defaults, banking panics and inflationary surges.
William C. Dudley, president of the Federal Reserve Bank of New York and vice chairman of the FOMC, said in a separate speech that “the recovery remains distinctly subpar in spite of aggressive monetary and fiscal stimulus.”
Bernanke and Dudley both said lawmakers should rein in budget deficits to ensure long-term growth without cutting back so quickly as to choke off the recovery.
“Establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates,” Bernanke said. On the other hand, “a sharp fiscal consolidation focused on the very near term could be self-defeating.”
Inflation Not Ingrained
While a recent increase in inflation is a “concern,” Bernanke said yesterday 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 Fed “will take whatever actions are necessary to keep inflation well controlled.”
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 Fed is “fully committed” to maintaining the dollar’s purchasing power and to keeping inflation in check, Dudley said during his speech in New York.
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 yesterday’s speech. Inflation is being restrained by “the stability of longer-term inflation expectations” and “weak demand for labor,” he said.
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,” Bernanke 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,” he 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.
Drag on Growth
Waning fiscal stimulus will also exert drag on growth, Bernanke said. He warned against sharp fiscal cutbacks at a time when the recovery is still fragile.
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 yesterday in a speech in Charlotte, North Carolina. “I’m troubled by what you might describe as a lack of conviction in this economy.”
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