Bernanke: Fed will stand pat on recovery – for now, that is
But central bank set to step in ‘as needed’ if conditions keep deteriorating, chairman says
WASHINGTON — Federal Reserve Chairman Ben Bernanke told Congress on Wednesday that even though the economic recovery has weakened, the Fed is planning no new steps to try to bolster it.
Bernanke said the Fed would consider action if matters worsened.
His comments to the Senate Banking Committee sent stocks tumbling. The Dow Jones industrial average had been up 20 points before he spoke. It fell as much as 160 points during his testimony before recovering somewhat. Investors shifted money into the safety of Treasury bonds.
“The markets are more paranoid than the Fed is about the economy’s health,” said David Resler, chief U.S. economist at Nomura Securities. Investors wanted to hear a strategy “that will make a second dip a very remote possibility.”
While noting the recovery’s fragility, Bernanke downplayed the odds that the economy will slide back into a so-called double-dip recession.
“If the recovery seems to be faltering, we have to at least review our options,” Bernanke told lawmakers. But he said no further action is planned for now because the economy is still growing.
Record-low interest rates are still needed to bolster the economy, Bernanke said. He repeated a pledge to keep them there for an extended period.
The recovery, which had been flashing signs of strengthening earlier this year, is losing momentum. Consumers have cut spending. Businesses, uncertain about the strength of their own sales or the economic recovery, are sitting on cash, reluctant to beef up hiring and expand operations.
A stalled housing market, near double-digit unemployment and an edgy Wall Street shaken by Europe’s debt crisis have also factored in the economic slowdown.
“In short, it look likes our economy is in need of additional help,” said the committee’s chairman, Sen. Chris Dodd, D-Conn.
Bernanke said the Fed is “prepared to take further policy actions as needed” to keep the recovery on track. Fed policymakers haven’t settled on “leading options,” but they are being explored, he said.
Bernanke is trying to send a positive message that the recovery will last in the face of growing threats. At the same time, he wants to assure Americans that the Fed will take new stimulative actions if necessary. With little appetite in Congress to provide a major new stimulus package, more pressure falls on Bernanke to keep the recovery going.
Bernanke and his Fed colleagues have cut their forecasts for growth this year.
If the recovery were to flash serious signs of
backsliding, the Fed could revive programs to buy mortgage securities or government debt. It could cut to zero the interest rate paid to banks on money left at the Fed or lower the rate banks pay for emergency Fed loans. The Fed also could create a new program to spark more lending to businesses and consumers in a bid to lure them to ratchet up spending and grow the economy.
Bernanke also said it would take a “significant amount of time” to restore the nearly 8.5 million jobs wiped out over 2008 and 2009. Unemployment is expect to stay high, in the 9 percent range, through the end of this year, under the Fed’s forecast.
High unemployment is a drag on household spending, Bernanke said, although he believed that both consumers and businesses would spend enough to keep the recovery intact.
Given the weak recovery, inflation is not a problem, Bernanke said.
To strengthen the economy, many economists predict the Fed will hold a key bank lending rate at a record low near zero well into 2011, or possibly into 2012.
Doing so would help nip any deflationary forces and keep a lid on interest rates on consumer loans. However, ultra-low lending rates haven’t been as effective as had been hoped in revving up the economy.
Ben Bernanke Federal Reserve chief plays down chances of ‘double-dip’ recession in testimony before U.S. Senate committee.