Ben Bernanke offers no hint of new action

The Federal Reserve chairman, Ben S Bernanke, gave no hint that the Fed was any closer to embarking on a new round of economic stimulus in prepared testimony submitted Tuesday to a Congressional committee.

Under questioning, he said that “we are looking for ways to address the weakness in the eoconomy should more action be needed.” He defended the Fed’s past use of asset purchases for this purpose given that interest rates were already so low, but said that further use of this kind of step, known as quantitative easing, “shouldn’t be used lightly.”

Despite a recent run of disappointing economic data, Bernanke repeated the Fed’s June forecast that economic growth would continue at a “moderate” pace in coming quarters before picking up “very gradually.”

Bernanke also renewed his frequent warnings that current fiscal policy is endangering economic growth. He said planned cuts in federal spending at the end of the year could push the economy back into recession, while the projected long-term growth of spending was an “unsustainable path.”

“The most effective way that Congress could help to support the economy right now,” Bernanke said in his testimony, “would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery.”

He also noted that a European crisis could undermine domestic growth.

Asked about the recent disclosures of manipulation of the London interbank offered rate, a benchmark interest rate known as Libor, Bernanke said the Fed and other regulators had moved rapidly and effectively in 2008, 2009 and 2010 after the problems first became known. But he said more should be done to fix what he called flaws in the system, which is based on a poll of banks, not on actual recorded loans.

“I would like to see additional reforms to the Libor process, assuming that the Libor will continue to be a benchmark” for setting other lending rates, he said. And he also suggested the possibility of a new approach, using one of the other available benchmarks “which have the advantage over Libor that they are market rates rather than simply reported rates.”

Bernanke’s cautious testimony underscored the Fed’s reluctance to ride once again to the aid of a plodding economy. The central bank has intervened repeatedly when the economy appeared at risk of sliding back into recession, and Bernanke’s testimony Tuesday included his standard promise to maintain that vigilance.

But the Fed has not acted with similar urgency to reduce the persistently high rate of unemployment when growth is merely lacklustre.

Congressional Republicans have repeatedly cautioned the Fed against taking new steps, warning of future inflation and suggesting that the Fed’s policies are allowing Congress to delay a reckoning with the federal debt.

Democrats provided almost no counterpoint during Bernanke’s appearances earlier this year, but some said they planned to do so this week.

Bernanke testifies Tuesday morning before the Senate Banking Committee, and Wednesday before the House Financial Services Committee, as part of his twice-a-year report to Congress on the state of monetary policy.

Neither side is likely to get the answers it wants. Bernanke has generally chosen not to use his appearances before Congress to foreshadow changes in Fed policy, preferring other forums. The Fed also continues to seek greater clarity about the health of the economy before officials decide whether to take additional action.

Growth remains too slow to reduce unemployment – “frustratingly slow,” Bernanke said Tuesday – but inflation continues to hover around the 2 per cent pace that the Fed considers healthy, constraining its appetite for additional action.

The government’s Consumer Price Index was unchanged in June and rose only 1.7 per cent over the previous 12 months, the Bureau of Labor Statistics reported Tuesday. A narrower measure that the Fed regards as a clearer view of price trends, because it excludes the fluctuations of food and energy prices, rose 0.2 per cent in June and 2.2 per cent over the previous 12 months.

The Fed announced a modest expansion in its efforts to stimulate growth after the most recent meeting of its policy-making committee in June. It said that it would continue to purchase long-term Treasury securities until the end of the year to reduce borrowing costs for businesses and consumers.

But analysts regarded that decision as a placeholder, a way of maintaining the status quo while the Fed waits to see if it must do more. The Fed’s policy making committee is scheduled to meet on July 31 and August 1.

 

© 2012 The New York Times News Service