Bernanke: Drags On Economy May Last Into Next Year

Federal Reserve Chairman Ben Bernanke warned Wednesday that some of the problems that are slowing the U.S. economy could persist into next year.

Bernanke said at a news conference that the slowdown could be due, in part, to the depressed housing market and other factors that aren't likely to fade soon.

"We don't have a precise read on why this slower pace of growth is persisting," Bernanke said. "Maybe some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector ... some of the headwinds may be stronger and more persistent than we thought."

Bernanke's comments came as the Fed lowered its forecast for growth and raised its expectation for unemployment this year. The weaker outlook and Bernanke's acknowledgment that some of the problems may persist into 2012 suggested that the Fed recognizes the economy is struggling.

"The Fed is well aware now that the economy has slowed," said Lyle Gramley, senior economic adviser with Potomac Research Group. "They are not at all sure where the economy is going."

The central bank announced no further efforts to boost the economy.

In an updated forecast, the Fed estimates that the economy will grow between 2.7 percent and 2.9 percent this year. That's down from its April estimate of between 3.1 percent and 3.3 percent. The downgraded revision is an acknowledgement that the economy has slowed, in part because consumers have been squeezed by higher gasoline prices.

Growth at the rate the Fed is projecting won't be enough to significantly lower unemployment, now at 9.1 percent. The Fed estimates that unemployment will still be around 8.6 percent to 8.9 percent by the end of the year.

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 Fed's downward revisions were in line with private economists, who have also been scaling back their forecasts to reflect a batch of weaker-than-expected reports in recent weeks. The latest poll of top economists surveyed by The Associated Press showed they expect the unemployment rate will be 8.7 percent at year's end, within the Fed's new estimate, and that the economy will grow 2.6 percent this year.

Growth would need to pick up in the second half of this year to meet even the reduced estimates of the private economists and the Federal Reserve. The economy grew at an anemic 1.8 percent annual rate in the first three months of the year. Many economists believe the economy is expanding only slightly more in the current quarter.

The Fed trimmed the top range for overall inflation in the new forecast. That reflects the fact that the spike in energy prices earlier this year has begun to recede.

The Fed now sees inflation rising 2.3 percent to 2.5 percent this year, as measured by a price gauge tied to consumer spending. That compares with an April forecast that showed a higher upper range of 2.8 percent.

The Fed estimates that "core" inflation, which excludes energy and food, will increase 1.5 percent to 1.8 percent. That's slightly higher than its April forecast of an increase of 1.3 percent to 1.6 percent.

The revised estimate is still within the Fed's comfort zone for inflation.

The new statement acknowledged the slowdown that has 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 Fed said it was ending its $600 billion Treasury bond buying program, Bernanke didn't rule out another program of bond purchases if the economy deteriorated further.

"We are prepared to take additional actions if conditions warrant," he said.

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

The Fed announcement had little impact on the stock and bond markets. The major indexes ended trading slightly lower.

"The markets got exactly what they had been expecting," said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University. "The fact that we did not have any surprises is comforting."

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 percent in the first three months of the year. It isn't expected to be much higher in the current quarter.

Beyond high gas prices and supply disruptions caused by the earthquake and tsunami in Japan, the Fed is now facing a new problem: renewed jitters that a debt crisis in Greece could spread to other heavily indebted European nations and send shockwaves through global financial markets.

Asked about the prolonged slump in housing, which is weighing on the economy, Bernanke said, "The housing sector is very important to the overall recovery, so we pay a lot of attention to that."

He didn't outline any new initiatives to support the home-buying market.

Bernanke described the debt crisis in Greece as a "very difficult situation." He said that if Greece defaulted on its debt, the impact would go beyond Europe and threaten the global economy.

In answer to another question, Bernanke said the effect on financial institutions would likely be "very small." But he said a spiraling Greek debt crisis that roiled financial markets would pose more severe threats.

The Fed chairman made the comments at his second news conference of the year. Under a new Fed policy, he plans to take questions from reporters four times each year.

Bernanke was asked about the potential timetable for the Fed to keep its main interest rate near zero for "an extended period" to stimulate the economy. He said the continued use of "extended period" in the Fed's statements meant it's at least two or three meetings away from raising rates. The Fed meets every six to eight weeks.

Most private economists say they think the Fed won't begin raising rates for another full year.

Supporters say the bond purchases have worked, in part by keeping rates low and encouraging spending. Low long-term rates are vital for consumers buying homes and cars and for companies making investments.

They also argue that those lower rates fueled a stock rally. When Bernanke outlined plans for the bond-buying program in late August, the Standard & Poor's 500 index was down 6 percent for the year. Eight months later, the S&P 500 was up 28 percent. Lower rates made stocks more attractive to investors than bonds, whose yields were falling.

Falling bond yields have also helped keep mortgage rates near record lows. The average rate on a 30-year mortgage has stayed below 5 percent for all but two weeks this year and was 4.5 percent last week. Still, low rates have done little to boost home sales, which fell in May to the lowest level since November.

Critics, including some Fed officials, saw things differently. They warned that by pumping so much money into the economy, the Fed increased the risks of high inflation later.

Full text of the Fed statement
Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.


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