–Chance That Europe Situation Worsens Further Still Significant Risk
By Brai Odion-Esene
WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke broke no
new ground Tuesday on the ongoing debate about whether or not the Fed
should do more to help the economy, simply reiterating his concerns
about the stubbornly high unemployment rate and the growing downside
risks to policymakers’ outlook.
In testimony presenting the Fed’s semiannual Monetary Policy Report
before the Senate Banking Committee, Bernanke spoke of the significant
risks posed by Europe’s dual crisies, the looming ‘fiscal cliff’ here at
home, and said the Federal Open Market Committee — its policymaking
body — stands ready “to take further action as appropriate” should it
be necessary.
The testimony was more downbeat compared to that last time Bernanke
gave this report on February 29.
Bernanke noted the rise in concern among Fed officials regarding
the future path of the recovery, saying, “participants at the June FOMC
meeting indicated that they see a higher degree of uncertainty about
their forecasts than normal and that risks to economic growth have
increased.”
The Fed chairman singled out what he described as two “main
sources” of risk, the banking and fiscal crises in the eurozone and the
U.S. fiscal situation.
He said financial strains linked to the crisis in Europe have
increased since earlier in the year, while te U.S. recovery continues to
be held back by “a number of headwinds, including still-tight borrowing
conditions for some businesses and households, and … the restraining
effects of fiscal policy and fiscal uncertainty.”
“Reflecting its concerns about the slow progress in reducing
unemployment and the downside risks to the economic outlook, the
Committee made clear at its June meeting that it 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 said.
With regards to Europe, Bernanke said the continent’s financial
markets and economies remain under “significant stress,” with spillover
effects on conditions in the global economy, including the United
States.
“The possibility that the situation in Europe will worsen further
remains a significant risk to the outlook,” he warned.
He added that despite an improvement in the capital and liquidity
positions of U.S. banks, a siginficant disruption in global financial
markets — caused by an escalation in the euro area crisis — “would
inevitably pose significant challenges for our financial system and our
economy.”
As for the U.S. fiscal situation, Bernanke warned that the recovery
“could be endangered” by the combination of tax increases and spending
cuts that will come into effect early next year if lawmakers do not act.
He pointed to a warning by the Congressional Budget Office that if
the full range of tax hikes and spending cuts were allowed to take
place, “a shallow recession would occur early next year.”
So while U.S. fiscal authorities must take the fragility of the
recovery into account in their decisionmaking, “the development of a
credible medium-term plan for controlling deficits should be a
priority,” Bernanke said.
Speaking more in-depth about domestic economic conditions, Bernanke
warned that with economic activty forecast to be “not much above” the
rate needed to absorb new entrants to the labor force, “the reduction in
the unemployment rate seems likely to be frustratingly slow.”
Bernanke said some of the slowdown in employment growth can be
attributed to seasonal adjustment and warm weather, but that these
factors account for “only a part” of the loss of momentum in job
creation.
As for inflation, Bernanke said the FOMC made “comparatively small
changes” to its outlook following the June meeting, and noted that the
recent sharp fall in oil prices has brough inflation down.
He repeated the FOMC central tendency forecast for inflation to be
1.2% to 1.7% this year, “at or below the 2% level that the Committee
judges to be consistent with its statutory mandate in 2013 and 2014″
He noted that while the recovery has continued, growth appears to
have decelerated “somewhat” during the first half of 2012.
Recent data indicate a somewhat slower pace of growth in household
spending in Q2, Bernanke said, with fears about jobs and income meaning
“their overall level of confidence remains relatively low.”
The chairman did note “modest” signs of improvement in housing, but
added that a number of factors continue to impede progress in that
sector.
Would-be buyers are deterred by worries about their finances and
the economy, he said, while others cannot obtain loans due to tighten
lending standards.
On the supply side, Bernanke said the large number of vacant homes
— amplified by the addition of foreclosed properties onto the market —
continues to divert demand from new construction.
Manufacturing production has also slowed in recent months, Bernanke
continued, reflecting economic stressesin Europe.
He cautioned that “forward-looking indicators of investment demand
… suggest further weakness ahead.”
Still, Bernanke said he believes that the headwinds to the U.S.
recovery should fade over time, “allowing the economy to grow somewhat
more rapidly and the unemployment rate to decline toward a more normal
level.”
** MNI Washington Bureau: 202-371-2121 **
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