Fed Retaining Interest Rates at Record Lows

June 22, 2011 by · Leave a Comment 

The Federal Reserve acknowledged Wednesday (June 22) that the economy is growing more slowly than it expected. But it said it will complete its $600 billion Treasury bond buying program by June 30 as planned and announced no further efforts to boost the economy.

Ending a two-day meeting, the Fed repeated a pledge to keep interest rates at record lows near zero for “an extended period,” a promise it’s made for more than two years.

Fed officials said in a statement that they think the main causes of the economy’s slowdown, such as high gas prices and supply disruptions from Japan’s disasters, are temporary. Once those problems subside, Fed officials said the economy should rebound.

Still, the statement stood in contrast to the Fed’s more upbeat view when officials last met eight weeks ago. At that time, the central bank said the job market was gradually improving.

The new statement acknowledged the slowdown that’s occurred over the past two months. The economy added just 54,000 jobs in May, far fewer than in the previous two months. Consumer spending has weakened, too.

The Fed said it would keep its holdings of Treasury bonds at current levels. That policy is intended to keep consumer and business loan rates at low levels to stimulate spending.

Though the central bank noted that inflation has risen, it expects those pressures to be temporary as well.

Bernanke and his colleagues are trying to keep a fragile economy on track two years after the Great Recession officially ended. A spike in gasoline prices earlier this year made consumers and businesses more cautious about spending. Employers scaled back hiring in May.

Economic growth slowed to 1.8% in the first three months of the year. It isn’t expected to be much higher in the current quarter.

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Bernanke Calls Job Market ‘Far From Normal’

June 7, 2011 by · Leave a Comment 

The economy lost some momentum recently, Ben Bernanke acknowledged Tuesday (June 7), but the Federal Reserve chairman is still optimistic that the recovery will pick up again in the second half of the year.

CNN reported that Bernanke twice called the job market “far from normal” and conceded, “the economy is still producing at levels well below its potential.” But he also said the factors behind recent weakness are likely to fade in coming months.

The economy is still feeling the lingering effects of Japan’s earthquake and tsunami, he said. And surging oil prices — which he blames on stronger demand from emerging markets — are likely to stabilize.

“With the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year,” he said at the International Monetary Conference in Atlanta, Ga. Tuesday.

Bernanke also called on lawmakers to address the national deficit with a long-term outlook, but cautioned Congress against making any drastic cuts that could derail the economic recovery. Sharp cuts could be “self-defeating” he said, if they were to “undercut the still-fragile recovery.”

“Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation,” he said in prepared text.

Bernanke’s speech follows an onslaught of weaker-than-expected economic reports recently, including a disappointing jobs report on Friday.

Later this month, the Federal Reserve is expected to wind down its $600 billion stimulus program known as quantitative easing, or QE2 because it’s the second round of such purchases.

Bernanke left the door open for more accommodative monetary policy, saying interest rates are likely to remain “exceptionally low” for an extended period, and did not dismiss the idea of further easing.

He also said that should his inflation predictions be wrong, the Fed “would respond as necessary.

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Fed Chief: Oil Price Rise ‘Temporary, Modest’

March 2, 2011 by · Leave a Comment 

Fed Chairman Ben Bernanke

Fed Chairman Ben Bernanke

Federal Reserve Chairman Ben Bernanke boldly predicted to Congress on Tuesday (March 1) that rising oil prices will cause only a brief and modest rise in consumer inflation, the Associated Press reported.

If he’s wrong, as some lawmakers suggested to him, the risks are high: a weaker economy and elevated consumer inflation.

Bernanke’s credibility is at stake, too. His duties as Fed chief require a balancing act: Leading the economy to stronger growth while making sure inflation doesn’t rise too high.

Appearing before the Senate Banking Committee, Bernanke faced sharp questions about whether rising gasoline prices could spread dangerous inflation through the economy. He said he did not think so.

“The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation,” Bernanke said.

Still, persistently higher prices could shake consumer confidence, prompting consumers to reduce spending. And that would weaken the economy, he acknowledged.

Gas prices jumped over the weekend to a new nationwide average of $3.37 a gallon. That’s 26.7 cents a gallon more than a month ago. Food prices in January rose at the fastest pace since the fall of 2008.

Sen. Patrick Toomey, R-Pa., called the rise in commodity prices “stunning.” Toomey said he worries about the effects of those higher prices, combined with the Fed’s efforts to boost the economy through a Treasury bond-purchase program. Toomey said they might be “planting the seeds of serious inflation down the road.”

Bernanke defended the Fed’s $600 billion Treasury bond-buying program. He said it is still needed to energize the economy and reduce unemployment, now at 9%. The bond-buying program is intended to lower rates on loans and lift stock prices, spurring more spending.

Republicans in Congress and some Fed officials say they fear the bond purchases could trigger high inflation and a wave of speculative buying on Wall Street that could lead to new bubbles in the prices of assets like stocks and bonds.

“Once price stability has been lost, it is difficult and very costly to regain,” warned Sen. Richard Shelby of Alabama, the panel’s top-ranking Republican.

Shelby pointed to the toxic situation in the late 1970s and 1980s when inflation hit double digits. To combat out-of-control prices, Fed Chairman Paul Volcker ratcheted up interest rates. Unemployment soared. And the economy fell into a deep recession.

Bernanke said the rise in oil and global commodities prices was due to stronger demand from fast-growing countries like China, not to the Fed’s stimulative policies. But he ran into concerns from Democrats as well as Republicans on the committee.

“I see food prices rising,” said Sen. Robert Menendez, D-N.J. “I see gas prices rising even before what was happening in North Africa, although that certainly is an exacerbating reality. Tuition rates rising … I just see a combination of rising prices for the average family.”

One reason the Fed launched the bond-buying program in November was to prevent deflation — a prolonged drop in prices of goods, wages and values of homes and stocks. But Bernanke told lawmakers that the risk of deflation has become “negligible.”

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Bernanke: U.S. Economic Outlook ‘Uncertain’

July 21, 2010 by · 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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