Bernanke Sees Improvement in Economy Vulnerable to Shocks

Federal Reserve Chairman Ben S. Bernanke said the economy has shown signs of improvement while remaining vulnerable to shocks, and he called on lawmakers to reduce the long-term U.S. budget deficit.

“Fortunately, over the past few months, indicators of spending, production, and job-market activity have shown some signs of improvement,” Bernanke said today in testimony to the House Budget Committee in Washington. “The outlook remains uncertain, however, and close monitoring of economic developments will remain necessary.”

Bernanke repeated the Federal Open Market Committee’s Jan. 25 statement that the outlook for the economy would likely warrant near-zero interest rates through at least late 2014. The FOMC also established an inflation goal of 2 percent, achieving Bernanke’s longstanding aim to reduce “public uncertainty” about monetary policy.

“In an environment of well-anchored inflation expectations, more-stable commodity prices, and substantial slack in labor and product markets, we expect inflation to remain subdued,” Bernanke said today.

The Standard & Poor’s 500 Index fell 0.2 percent to 1,321.94 at 12:42 p.m. in New York. The yield on the 10-year Treasury note was 1.82 percent, down one basis point from yesterday.

Parries Criticism

During questioning after his opening statement, Bernanke rejected criticism from Republican Representative Paul Ryan of Wisconsin, chairman of the budget committee, who said the Fed was willing to tolerate inflation above its target in order to bring down unemployment.

“We will not actively seek to raise inflation or to move away from the target,” Bernanke said. “We’re always trying to bring inflation back to the target.”

Reports indicating strength in the labor market, manufacturing and construction spending helped drive the S&P 500 up 4.4 percent last month for the best January since a 6.1 percent increase in 1997, according to data compiled by Bloomberg.

Applications for unemployment insurance payments dropped by 12,000 to 367,000 in the week ended Jan. 28, Labor Department figures showed today. The median forecast of 46 economists in a Bloomberg News survey projected 371,000.

‘Frustratingly Slow’

Even so, “the pace of the recovery has been frustratingly slow, particularly from the perspective of the millions of workers who remain unemployed or underemployed,” Bernanke said. “Moreover, the sluggish expansion has left the economy vulnerable to shocks.”

Bernanke devoted half of his speech to discussion of the U.S. budget deficit.

“To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time,” Bernanke said. “Achieving this goal should be a top priority.”

At the same time, Congress should “take care not to unnecessarily impede the current economic recovery,” Bernanke said.

The nonpartisan Congressional Budget Office said this week it expects the budget deficit to narrow to $1.1 trillion this fiscal year from $1.3 trillion last year. The deficit would reach $1.5 trillion by 2022, CBO estimated, and the debt would rise to levels unseen since the government was paying off its World War II expenses.

Household Spending

The Fed chairman said progress in payroll growth will be an important determinant to household spending in coming quarters, which in turn will influence the pace of the expansion.

Bernanke noted that the labor market “improved modestly” over the past year. Total non-farm payrolls are forecast to rise by 145,000 jobs tomorrow, when the Labor Department releases its January report. The unemployment rate is likely to remain at 8.5 percent, economists predict, where it was in December, down from 8.7 percent the previous month.

“We still have a long way to go before the labor market can be said to be operating normally,” Bernanke told the committee. “Particularly troubling is the unusually high level of long-term unemployment: More than 40 percent of the unemployed have been jobless for more than six months, roughly double the fraction during the economic expansion of the previous decade.”

Manufacturing Growth

Manufacturing in the U.S. grew in January at the fastest pace in seven months, according to a report from the Institute for Supply Management. The Tempe, Arizona-based group’s manufacturing index rose to 54.1, from 53.1 in December. Figures exceeding 50 signal expansion.

United Parcel Service Inc., the world’s largest package-delivery company, forecast a 2012 profit that exceeded analysts’ estimates as shipping demand increases.

“We certainly are seeing a better U.S. economy than we would have thought back in probably August, September,” said UPS Chief Executive Officer Scott Davis in a Jan. 31 call with investors and analysts. “Back in that timeframe, people were talking about a chance for a second recession. You don’t hear that anymore.”

Still, consumer confidence unexpectedly dropped in January and a gauge of business activity fell. The Conference Board said this week that its confidence index decreased to 61.1, lower than the most pessimistic forecast in a Bloomberg News survey of economists, from a revised 64.8 reading the prior month.

Consumer Confidence

Bernanke noted that consumer confidence “remains at levels that are quite low by historical standards” and that the “pace of growth in business investment has slowed, likely reflecting concerns about the domestic outlook and developments in Europe.”

“There are signs that these concerns are abating somewhat,” he said, “if business confidence continues to improve, U.S. firms should be well positioned to increase both capital spending and hiring.”

The 58-year-old Fed chief said in a press conference last week that a third round of large-scale asset purchases is “an option that is certainly on the table.”

Bernanke’s views were echoed in a Jan. 27 speech by Federal Reserve Bank of New York President William C. Dudley, who said the economy will probably slow this year due to “significant impediments,” and that the central bank “will continue to do its part in supporting the recovery.”

Bond Purchases

The Fed’s second round of bond buying, or quantitative easing, drew fire from Republican lawmakers when it was announced in November 2010. Among the critics was Ryan, who said the purchases risked creating asset-price bubbles and fueling inflation.

“I was greatly concerned to hear the Fed recently announce that it would be willing to accept higher-than-desired inflation in order to focus on the other side of its dual mandate, which is promoting employment,” Ryan said in opening remarks today.

Ryan has also called for government spending cuts. He proposed a plan last year to reduce deficits by slicing $6.2 trillion over 10 years from Medicare and scores of other programs including Medicaid, food stamps, farm subsidies and Pell college tuition grants.

Criticism of Bernanke has also flared in the race for the Republican nomination for president, with candidates Mitt Romney and Newt Gingrich saying they wouldn’t keep Bernanke as Fed chief. His four-year term as chairman expires on Jan. 31, 2014.