July 13 (Bloomberg) -- Federal Reserve Chairman Ben S.
Bernanke told Congress the central bank is prepared to take
additional action, including buying more government bonds, if
the economy appears to be in danger of stalling.
“The possibility remains that the recent economic weakness
may prove more persistent than expected and that deflationary
risks might reemerge, implying a need for additional policy
support,” Bernanke said in prepared testimony before the House
Financial Services Committee in Washington today. “The Federal
Reserve remains prepared to respond should economic developments
indicate that an adjustment of monetary policy would be
appropriate.”
The comments are Bernanke’s first since a government report
on July 8 showed the economy added 18,000 jobs in June, less
than the most pessimistic forecast in a Bloomberg News survey of
economists. Bernanke said that “disappointing” job growth in
May and June was partly a result of temporary effects, such as
high energy prices, and repeated that the economy will pick up
in the second half of the year.
“Once the temporary shocks that have been holding down
economic activity pass, we expect to again see the effects of
policy accommodation reflected in stronger economic activity and
job creation,” Bernanke said. He also said that “the economy
could evolve in a way that would warrant a move toward less-
accommodative policy.”
Bernanke said the central bank still has ammunition to aid
the recovery if the recent economic weakness proves more
persistent than policy makers currently expect.
‘Extended Period’
To bolster the economy, Bernanke re-affirmed plans by the
Fed to sustain record stimulus and to hold its benchmark
interest rate near zero for an “extended period.”
Bernanke acknowledged there are “uncertainities” in both
directions -- about the strength of the economic recovery and
the prospects for inflation -- over the medium term.
The Fed chief repeated his belief that inflation won’t be a
problem for the economy because gasoline and food prices, which
had surged earlier this year, are now moderating.
At the same time, Bernanke also reiterated that sagging
home prices, high unemployment and hard-to-get loans pose long-
term obstacles to growth, while leaving open the door to
additional monetary stimulus if the economy were to falter.
One option, Bernanke said, would be to pledge to hold rates
at record lows and the Fed’s balance sheet at a record high
close to $3 trillion for a longer period of time. Another option
is to embark on a third round of government bond purchases or to
increase the average maturity of the Fed’s current securities
holdings. The Fed also could reduce the interest rate it pays
banks on excess reserves parked at the central bank.
Inflation Outlook
Bernanke said there is also the possibility that inflation
could pick up in a way that would require the Fed to begin
tightening credit and exit its record monetary stimulus.
The Fed last month completed a program to buy $600 billion
worth of Treasury bonds aimed to stimulate the economy by
reducing borrowing costs, boosting stock prices and spurring
consumer spending.
Bernanke said the program has helped the economy. Stock
prices are higher and bond yields have fallen. He estimated that
effect of the program was roughly equivalent to a 40 to 120
basis-point reduction in the federal funds rate. And, the second
round of bond buying lowered long-term interest rates by roughly
10 to 30 basis points.
In terms of job creation, Bernanke cited estimates made in
the fall that the bond-purchase program could boost employment
by about 700,000 over two years, or by about 30,000 extra jobs a
month.
Press Conference
Bernanke at a June 22 news conference didn’t rule out
additional purchases if the economy were to weaken further. He
and his colleagues pledged at a meeting the same day to hold the
Fed’s benchmark interest rate in a range of zero to 0.25 percent,
where it’s been since December 2008.
Minutes of the Fed’s meeting released yesterday showed that
policy makers were divided on whether additional monetary
stimulus will be needed if the outlook for economic growth
remains weak.
A few Fed members thought the committee “might have to
consider providing additional monetary stimulus, especially if
economic growth remained too slow to meaningfully reduce the
unemployment rate in the medium run,” the minutes said. A few
voiced concern inflation may accelerate and warrant the FOMC
“taking steps to begin removing policy accommodation sooner
than currently anticipated.”
Economic growth slowed to a 1.9 percent annual pace in the
first three months of this year from a 3.1 percent rate in the
final quarter of 2010. Fed policy makers blamed bad weather and
energy prices for sapping consumer spending.
Growth Forecast
The economy’s growth probably accelerated to a 2 percent
pace in the second quarter, according to the median forecast of
62 economists surveyed by Bloomberg from June 28 to July 7.
Shortages of parts for manufacturers caused by the earthquakes
and tsunami in Japan forced factories to slow production.
Parts supplies are rising, along with measures of
production. The Institute for Supply Management reported on July
1 that manufacturing expanded at a faster pace in June than the
prior month. Orders to U.S. factories also have picked up.
Economic growth will accelerate to a 3.2 percent pace
during the second half of this year, according to economists
surveyed by Bloomberg News.
The slowdown in the first six months of 2011 prompted Fed
officials to mark down their growth projections for the entire
year. They forecast that the rate of expansion won’t exceed 2.9
percent this year, down from April’s top-end forecast of 3.3
percent.
Jobless Rate
Unemployment by the end of the year will decline to between
8.6 percent and 8.9 percent. That’s higher than the range of 8.4
percent to 8.7 percent under the previous forecast.
Inflation, excluding food and energy, also will be slightly
higher this year, between 1.5 percent and 1.8 percent. That’s up
from a range of 1.3 percent to 1.6 percent under the old
forecast.
Bernanke, in his prepared testimony, didn’t directly speak
about political wrangling between President Barack Obama and
Republicans in Congress over boosting the $14.3 trillion debt
ceiling and slicing deficits over the next 10 years.
If politicians don’t come to an agreement before Aug. 2,
the federal government may default on its debt. Bernanke has
said that could create instability in financial markets and hurt
the economic recovery.
Lawmakers Divided
Lawmakers are divided over whether to include tax increases
along with spending cuts as they negotiate the possible increase
of the $14.3 trillion debt limit before Aug. 2, the date on
which the Treasury Department said it will have exhausted its
borrowing authority.
Bernanke said in a June 14 speech that using the debt limit
deadline to force some “necessary and difficult fiscal-policy
adjustments” is “the wrong tool for that important job.”
President Barack Obama urged Republican leaders Monday to
compromise on their opposition to tax increases and achieve
“the largest possible deal” to cut the federal budget deficit.
Obama said he will meet every day until an agreement is reached.
House Speaker John Boehner, a Republican from Ohio, has said the
House cannot pass legislation that increases taxes.
For all the concern in Washington about the deficit, bond
yields in the U.S. are lower now than when the government was
running a budget surplus a decade ago. The yield on the
benchmark 10-year Treasury note is below the average of 7
percent since 1980 and the average of 5.48 percent in the 1998
through 2001 period, according to Bloomberg Bond Trader.
Lockheed Martin Corp., the world’s largest defense
contractor, and Cisco Systems Inc., the largest networking
equipment company, are among firms reducing employment.
Cisco, based in San Jose, California, may cut as many as
10,000 jobs, including 7,000 by the end of August in a bid to
revive profit growth. Lockheed Martin, based in Bethesda,
Maryland, said late last month that it plans to eliminate about
1,500 employees from its Aeronautics business unit that makes F-
35 jet fighters.
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