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Bernanke: U.S. Economic Outlook ‘Uncertain’
Posted By RVBusiness On July 21, 2010 @ 4:51 pm In Breaking News | 1 Comment
Federal Reserve Chairman Ben Bernanke told Congress today (July 21) the economic outlook remains “unusually uncertain,” and the central bank is ready to take new steps to keep the recovery alive if the economy worsens.
Testifying before the Senate Banking Committee, Bernanke also said record low interest rates are still needed to bolster the economy. He repeated a pledge to keep them there for an “extended period,” the Associated Press reported.
Bernanke downplayed the odds that the economy will slide back into a “double-dip” recession. But he acknowledged the economy is fragile.
Given that, the Fed is “prepared to take further policy actions as needed” to keep the recovery on track, he said. He didn’t mention specific action being explored by the Fed policymakers. But they still have options beyond holding rates at record lows — including reviving some crisis-era programs.
Bernanke is trying to send Congress, Wall Street and Main Street a positive message that the recovery will last in the face of growing threats. At the same time, he wants to assure Americans that the Fed will take new stimulative actions if necessary.
Wall Street wasn’t convinced. Shortly before Bernanke spoke, the Dow Jones industrial average was up about 20 points. Within minutes, stocks began falling and the Dow was down more than 100 points.
The recovery, which had been flashing signs of strengthening earlier this year, is losing momentum. And fears are growing that it could stall.
Consumers have cut spending. Businesses, uncertain about the strength of their own sales or the economic recovery, are sitting on cash, reluctant to beef up hiring and expand operations. A stalled housing market, near double-digit unemployment and an edgy Wall Street shaken by Europe’s debt crisis are other factors playing into the economic slowdown.
“In short, it look likes our economy is in need of additional help,” said the committee’s chairman, Sen. Chris Dodd, D-Conn. And, Sen. Richard Shelby of Alabama, the highest-ranking Republican on the panel, said the economic outlook has become a “bit more clouded.”
With little appetite in Congress to provide a major new stimulus package, more pressure falls on Bernanke to keep the recovery going.
Bernanke and his Fed colleagues have cut their forecasts for growth this year.
If the recovery were to flash serious signs of backsliding, the Fed could revive programs to buy mortgage securities or government debt. It could lower the interest rate paid to banks on money left at the Fed or cut the rate banks pay for emergency Fed loans. The Fed also could create a new program to spark more lending to businesses and consumers in a bid to lure them to ratchet up spending and grow the economy.
Bernanke said the debt crisis in Europe, which has rattled Wall Street, played a role in the Fed’s “somewhat weaker outlook.” Although financial markets have improved considerably since the depth of the financial crisis in the fall of 2008, conditions have become “less supportive of economic growth in recent months,” he explained.
As a result, Bernanke said progress in reducing the nation’s unemployment rate, now at 9.5%, is now expected to be “somewhat slower” than thought. Unemployment is expect to stay high, in the 9% range, through the end of this year, under the Fed’s forecast.
High unemployment is a drag on household spending, Bernanke said, although he believed both consumers and businesses would spend enough to keep the recovery intact.
Bernanke also said it would take a “significant amount of time” to restore the nearly 8.5 million jobs wiped out over 2008 and 2009.
And, Bernanke said the housing market remains “weak” and noted that the overhang of vacant or foreclosed houses are weighing on home prices and home construction.
Given the weak recovery, inflation is not a problem, Bernanke said. However, Bernanke didn’t talk about deflation, a prolonged and destabilizing drop in prices for goods, the values of stocks and homes and in wages. Although most economists think the prospects of deflation are remote, some Fed officials have expressed concern about it.
To strengthen the economy, many economists predict the Fed will hold a key bank lending rate at a record low near zero well into 2011, or possibly into 2012. Doing so, would help nip any deflationary forces.
And keeping that bank rate at super low levels also would mean rates on certain credit cards, home equity loans, some adjustable-rate mortgages and other consumer loans would stay at their lowest point in decades.
Ultra-low lending rates, however, haven’t done much lately to rev up the economy. Consumers and businesses are cautious and aren’t showing an appetite to spend as lavishly as they usually do in the early stages of economic recoveries.
Bernanke, meanwhile, welcomed Congress’ new revamp of financial regulations signed into law by President Barack Obama on Wednesday. The new law, he said, “will place our financial system on a sounder foundation and minimize the risk of a repetition of the devastating events of the past three years.”
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