By Steven K. Beckner
SEATTLE, Wash. (MNI) – With a two-day Federal Open Market Committee
meeting two weeks off, Federal Reserve Chairman Ben Bernanke reiterated
Thursday that the FOMC will consider a range of monetary stimulus
options and that it stands ready to employ those “tools” “as
appropriate.”
Bernanke, in remarks prepared for delivery to the Economic Club of
Minnesota in Minneapolis, vowed that the Fed “will certainly do all that
it can to help restore high rates of growth and employment in a context
of price stability.”
He also had advice for fiscal policymakers, telling them to focus
on the long term and not to “disregard the fragility of the economic
recovery” — a strong suggestion that spending cuts or tax hikes should
be deferred.
As he had in a recent speech at the Kansas City Federal Reserve
Bank’s annual symposium in Jackson Hole, Bernanke said the economy is
laboring under a variety of headwinds in the wake of a severe financial
crisis and housing slump, but stressed that America’s long-term
fundamentals remain intact.
At its Aug. 9 meeting, the FOMC announced that it expected the
federal funds rate to remain “exceptionally low,” i.e. zero to 25 basis
points, “at least through mid-2013.” And Bernanke said this means that
“in what the Committee judges to be the most likely scenarios for
resource utilization and inflation in the medium term, the target for
the federal funds rate would be held at its current low level for at
least two more years.”
But the FOMC may not leave it at that, he suggested.
“In addition to refining our forward guidance, the Federal Reserve
has a range of tools that could be used to provide additional monetary
stimulus,” he said. “My FOMC colleagues and I will continue to consider
those and other pertinent issues, including, of course, economic and
financial developments, at our meeting in September and are prepared to
employ these tools as appropriate to promote a stronger economic
recovery in a context of price stability.”
Bernanke has previously said that those tools could include another
round of quantitative easing, lengthening the average maturity of the
Fed’s securities portfolio to push down long-term interest rates ,
lowering the rate of interest the Fed pays on excess reserves and
specifying how long the Fed will maintain a bloated balance sheet.
After painting a dreary picture of current economic and financial
conditions, Bernanke concluded on an upbeat note.
“As monetary and fiscal policymakers consider the appropriate
policies to address the economy’s current weaknesses, it is important to
acknowledge its enduring strengths,” he said. “Notwithstanding the
trauma of the crisis and the recession, the U.S. economy remains the
largest in the world, with a highly diverse mix of industries and a
degree of international competitiveness that, if anything, has improved
in recent years.”
“Our economy retains its traditional advantages of a strong market
orientation, a robust entrepreneurial culture, and flexible capital and
labor markets,” he continued. “And our country remains a technological
leader, with many of the world’s leading research universities and the
highest spending on research and development of any nation.”
“Thus I do not expect the long-run growth potential of the U.S.
economy to be materially affected by the financial crisis and the
recession if–and I stress if–our country takes the necessary steps to
secure that outcome,” Bernanke went on. “Economic policymakers face a
range of difficult decisions, and every household and business must cope
with the stresses and uncertainties that our current situation
presents.”
“These are not easy tasks,” he said. “I have no doubt, however,
that those challenges can be met, and that the fundamental strengths of
our economy will ultimately reassert themselves.”
In earlier comments, the Fed chief said, “it is clear that the
recovery from the crisis has been much less robust than we had hoped.”
While some of the slump has been due to temporary factors, he said “the
incoming data suggest that other, more persistent factors also have been
holding back the recovery.”
He said consumer spending is being held back not just by temporary
factors, such as higher gasoline prices and disruptions to the auto
sector in the wake of the Japanese earthquake, but also “other important
headwinds as well, including the persistently high level of
unemployment, slow gains in wages for those who remain employed, falling
house prices, and debt burdens that remain high for many.”
Bernanke maintained that the recovery is not following a normal
course because “the recession, besides being extraordinarily severe as
well as global in scope, was also unusual in being associated with both
a very deep slump in the housing market and a historic financial
crisis.”
Bernanke said “financial stress continues to be a significant drag
on the recovery, both here and abroad.” And he said the overhang of
European debt worries and the United States’ own debt problems are also
weighing on the recovery.
“The prospect of an increasing fiscal drag on the economy in the
face of an already sluggish recovery highlights one of the many
difficult tradeoffs currently faced by fiscal policymakers,” he said.
“While prompt and decisive action to put the federal government’s
finances on a sustainable trajectory is urgently needed, fiscal
policymakers should not, as a consequence, disregard the fragility of
the economic recovery.”
As for inflation, he said it is “expected to moderate in the coming
quarters” as “transitory influences” wane.
“In addition to the stability of longer-term inflation
expectations, the substantial amount of resource slack that exists in
U.S. labor and product markets should continue to have a moderating
influence on inflationary pressures,” he said. “Notably, because of
ongoing weakness in labor demand over the course of the recovery,
nominal wage increases have been roughly offset by productivity gains,
leaving the level of unit labor costs close to where it had stood at the
onset of the recession.”
“Given the large share of labor costs in the production costs of
most firms, subdued unit labor costs should be an important restraining
influence on inflation,” Bernanke added.
** Market News International **
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