Fed considers new round of stimulus
Warns that inaction hurts U.S. recovery
WASHINGTON – The U.S. Federal Reserve chairman, Ben Bernanke, said Tuesday that the Fed was seeking greater clarity about the health of the recovery as it weighs the need for a new round of economic stimulus.
In testimony before the Senate banking committee, Bernanke also strongly defended the Fed’s actions after it learned of problems in 2008 with the London interbank offered rate, or LIBOR. And he renewed his warnings that congressional inaction on fiscal policy threatens to upend the recovery and tip the economy into recession.
Repeating a formula he first articulated this summer, Bernanke told the committee that the Fed’s decision about additional economic stimulus would turn on its judgment about the likely pace of job growth in coming months.
The crucial issue, he said, is “whether or not there is in fact a sustained recovery going on in the labour market or are we stuck in the mud.”
Bernanke also added a new wrinkle, saying the central bank “would certainly want to react against any increase in deflation risk.”
With the rate of unemployment stalled above eight per cent, and some measures of inflation expectations falling, Bernanke’s remarks were read by some analysts as pointing toward probable action in the coming months.
But Bernanke avoided commitments, saying Fed officials were continuing to review the data and to consider their options. He also noted that the Fed could take steps other than asset purchases, like extending its prediction that it will keep short-term rates near zero until late 2014.
“We are looking for ways to address the weakness in the economy should more actually be needed,” Bernanke told the committee.
Bernanke’s cautious testimony underscored the Fed’s reluctance to ride once again to the aid of a plodding economy. The central bank has intervened repeatedly when the economy appears at risk of sliding back into recession, and Bernanke’s testimony Tuesday included his standard promise to maintain that vigilance. But the Fed has not acted with similar urgency to reduce the persistently high rate of unemployment when growth is merely lacklustre.
The members of the committee seemed little interested in these questions of monetary policy, however, instead preferring to question Bernanke about revelations that banks had manipulated LIBOR, a benchmark rate used in determining the value of a wide range of financial assets.
As Pennsylvania Republican Patrick Toomey said to Bernanke: “I just wanted to touch briefly on monetary policy before moving onto the LIBOR scandal.”
In response to questions from members of both parties, Bernanke said the Fed has responded properly when it learned of problems with LIBOR by notifying British regulators, who oversee the index, and by offering sugges- tions for improvements.
Bernanke also renewed his frequent warnings that current fiscal policy is endangering economic growth. He said planned cuts in federal spending at the end of the year could push the economy back into recession, while the projected long-term growth of spending is an “unsustainable path.”
“The most effective way that Congress could help to support the economy right now,” Bernanke said in his prepared testimony, “would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery.” He also noted a European crisis could undermine domestic growth.
Republicans pressed Bernanke to forswear action, warning that new measures would eventually lead to higher inflation and suggesting that the Fed’s policies are allowing Congress to delay a reckoning with the federal debt.
Bernanke, who is scheduled to testify Wednesday before the House financial services committee as part of his twice-a-year report to Congress on the state of mon- etary policy. rejected both arguments. Of standing still to put pressure on Congress, Bernanke said dryly: “I don’t think that’s my responsibility.”
He also noted inflation remains under control, around the two- per-cent pace that the Fed considers healthy. The government’s index of consumer prices was unchanged in June and rose 1.7 per cent over the previous 12 months, the Bureau of Labor Statistics said Tuesday. A narrower measure the Fed regards as a clearer view of price trends, because it excludes the fluctuations of food and energy prices, rose 0.2 per cent in June and 2.2 per cent over the previous 12 months.
Democrats, continuing a recent pattern, were less forceful in their calls for additional action by the Fed. They received from Bernanke only the assurance that the Fed took the issue of unemployment seriously.
The Fed announced a modest expansion in its efforts to stimulate growth after the most recent meeting of its policy-making committee in June. It said it would continue to purchase long-term Treasury securities until the end of the year to reduce borrowing costs for businesses and consumers.
But analysts regarded that decision as a placeholder, a way of maintaining the status quo while the Fed waits to see whether it must do more. The Fed’s policy-making committee is scheduled to meet July 31 and Aug. 1.