Federal Reserve Chairman Ben S. Bernanke said progress in reducing unemployment is likely to be “frustratingly slow” and repeated the Fed is ready to take further action to boost the recovery, while refraining from discussing specific steps.
“The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year,” Bernanke said today in testimony for delivery to the Senate Banking Committee in Washington. The Fed is “prepared to take further action as appropriate to promote a stronger economic recovery,” he said.
Bernanke said growth is slowing as business investment cools in response to the European crisis and the prospect of fiscal tightening in the U.S. At the same time, households are restraining spending as unemployment remains elevated and credit is hard to get.
Bernanke and his colleagues on the Federal Open Market Committee are considering whether the economy will need additional stimulus to reduce a jobless rate stuck above 8 percent since February 2009. Minutes of their June meeting show that a few participants believed the Fed will need to do more, while several others said new easing would be warranted if growth slows, risks intensify or inflation seems likely to fall persistently below the Fed’s 2 percent target.
Stocks erased gains after the comments. The Standard & Poor’s 500 Index fell 0.2 percent to 1,350.39 at 10:06 a.m. in New York.
Recent economic data have had a “generally disappointing tone,” Bernanke said in the first of two days testifying before Congress as part of the central bank’s semiannual monetary policy report. The economy probably expanded at less than a 2 percent annual rate in the second quarter, he said.
The Fed last month sought to hold down borrowing costs and spur economic growth by extending through the end of this year its so-called Operation Twist program swapping shorter-term Treasury securities with longer-term debt.
Though he offered no specific policy ideas, Bernanke said the Fed is prepared to take further action “as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Bernanke told lawmakers that U.S. fiscal policies are on an “unsustainable path” that must be corrected with a “credible” plan to control deficits, while avoiding damage to the recovery from spending cuts and tax increases that will take effect next year if Congress doesn’t act.
The so-called fiscal cliff would push the economy into a “shallow recession” early next year, Bernanke said, citing an estimate from the Congressional Budget Office. “Additional negative effects” would result from public uncertainty about spending plans, including the debt ceiling, he told lawmakers.
“Fiscal decisions should take into account the fragility of the recovery,” Bernanke, 58, said. “The most effective way that the Congress could help to support the economy right now 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.”
The Fed chairman said Europe’s financial markets and economy “remain under significant stress,” and that’s creating “spillover effects” in the rest of the world including the U.S.
“The possibility that the situation in Europe will worsen further remains a significant risk to the outlook,” Bernanke said.
He said European authorities have strong incentives to resolve the crisis, and U.S. financial firms continue to take steps to manage their risks.
“That said, European developments that resulted in a significant disruption in global financial markets would inevitably pose significant challenges for our financial system and our economy,” he said.
The Fed chief is scheduled to testimony tomorrow before the House Financial Services Committee.
Bernanke’s remarks before Congress today are his first since the Labor Department reported on July 6 that employers added 80,000 jobs to payrolls in June, fewer than economists forecast, while the jobless rate was unchanged at 8.2 percent, the 41st consecutive month above 8 percent. Other reports showed manufacturing shrank in June for the first time since the recovery began and retail sales unexpectedly declined.
New York Senator Charles Schumer plans to press Bernanke on “potential monetary options, including a new round of full- scale bond buying,” that could help promote economic growth and reduce unemployment in the face of congressional gridlock, said a Schumer aide.
The aide, who spoke on condition of anonymity, said Schumer “plans to note that election-year politics have prevented Congress from enacting the kind of fiscal relief that the Fed chairman has subtly suggested is necessary.”
Senator Tim Johnson, a Democrat from South Dakota and banking committee chairman, said in a statement last week that he would question the Fed chief on the scandal surrounding the London interbank offered rate.
The New York Fed knew “some banks” were potentially understating submissions for Libor as early as 2007, according to a statement posted on its website on July 13. A Barclays Plc employee told a New York Fed staff member in April 2008 that the U.K.’s second-largest lender was underreporting its rate to avoid a “stigma,” the Fed bank said.
Retail sales unexpectedly declined in June for a third straight month, a sign that limited progress in job creation is holding back the biggest part of the economy. The 0.5 percent drop followed a 0.2 percent decrease in May, Commerce Department figures showed yesterday in Washington. The decline was worse than the most-pessimistic forecast in a Bloomberg News survey in which the median projection called for a 0.2 percent rise.
Confidence among U.S. consumers unexpectedly declined in July to the lowest level this year as Americans grew more pessimistic about their finances, according to the Thomson Reuters/University of Michigan index of consumer sentiment.
“The lower-income consumer continues to be very stressed” because of weak job growth, Howard Levine, chairman and chief executive of Family Dollar Stores Inc., told analysts on a June 28 conference call.
The Fed’s actions to hold down interest rates have kept the yield on 10-year Treasuries near record lows. The yield was 1.47 percent at late yesterday, compared with the all-time low of 1.44 percent recorded on June 1.
The Standard & Poor’s 500 Index has risen 7.6 percent this year as of yesterday yet is 4.6 percent below its 2012 peak reached in April.
At their last meeting, several Fed policy makers said the central bank should consider developing “new tools” to help support a stronger economic recovery, without specifying what those tools might be.
Policy makers also discussed the prospect that Europe’s financial crisis could spill over to the U.S. financial system and said the continent’s debt crisis is intensifying risks to the U.S. outlook.
Underscoring the range of views on the risks from Europe, billionaire Warren Buffett said the region’s currency is doomed to fail without changes in how it works, while JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told analysts Europe is making progress in solving its crisis.
“You see progress, you know, two steps forward, one step back,” Dimon said July 13 in a meeting in New York. Buffett, speaking the same day in a Bloomberg Television interview from Sun Valley, Idaho, said European leaders face “major problems” and the 17-country euro area may not survive.
U.S. central bankers have also identified the so-called fiscal cliff as a threat to the outlook for growth. Unless Congress acts, $600 billion in tax increases and spending cuts are set to take effect automatically at the start of next year.
The International Monetary Fund cut its 2013 global growth forecast yesterday to 3.9 percent compared with its April forecast of 4.1 percent.
The Fed, aiming to promote financial-market stability and fuel growth, has held interest rates near zero since December 2008 and purchased $2.3 trillion of securities in two rounds of large scale asset purchases.
When the central bank completes its extension of Operation Twist at the end of 2012 it will have exchanged $667 billion of short-term debt for longer-term securities. Several central bankers said extending the program will probably have a “modest” effect on already-low interest rates. Richmond Fed President Jeffrey Lacker dissented from the decision, arguing the move would do little to help growth or employment.
San Francisco Fed President John Williams and the Chicago Fed’s Charles Evans said last week the central bank could step up stimulus through a third round of asset purchases, including buying mortgage-backed securities.