At pivotal moment, Bernanke low on economic ammo

This is not the situation Ben S. Bernanke wanted to be in.

When he took the stage for his annual address in Jackson Hole, Wyo., four years ago, the Federal Reserve chairman had a broad arsenal of weapons that he would soon use to rescue the U.S. financial system from collapse.

On Friday, he returns to the yearly economic conference still facing huge economic challenges, but now he’s far more constrained by both politics and limitations on what the Fed can do to help the economy.

With his speech sandwiched between the national political conventions, there is more political pressure on Bernanke than perhaps ever before.

Republicans are insisting that he refrain from doing anything more to try to pump up economic growth. Democrats, who tend to be more reserved on the matter, are demanding that he take new action.

The truth, Bernanke has said repeatedly, is that the Fed’s ability to change the direction of the economy is limited, and it’s not clear the benefits of new measures outweigh the potential costs.

Economists say new Fed actions are likely to have only a small effect on job creation. Bernanke doesn’t have control over the two biggest factors affecting economic growth: how Congress and the president handle the government’s spending and taxation choices, and how Europe’s leaders respond to their continent’s crisis.

Yet global investors are looking to him — and not the two men addressing millions of people this week and next as they campaign for president — for a sign the U.S. government will do something to keep the U.S. economy, and by extension the global one, healthy.

Bernanke is unlikely to give any clear hints.

Although the recent minutes of the last Federal Reserve meeting suggest that the Fed is strongly considering undertaking new measures to gin up growth, the Fed chairman has been remarkably careful about telegraphing fresh action ahead of time.

Last year and the year before, for example, Bernanke did not use his Jackson Hole address to clearly herald new stimulus. Yet in both cases, the Fed acted shortly after.

This time around, Bernanke has at least two good reasons to hold off on signaling any new steps.

For one, the federal government will release its monthly job report at the end of next week. That information, showing whether the labor market is gaining strength or not, could be a crucial factor in determining what, if any, action the Fed would take.

Second, Bernanke doesn’t have long to wait for another chance to announce any new initiative. The Fed’s governing committee meets Sept. 12 and 13.

Meanwhile, the economy continues to send mixed signals about whether the recovery is gaining pace.

That happened Wednesday, when the Fed released its Beige Book, an informal assessment of conditions across the country, and the Commerce Department revised its estimate for economic growth last quarter.

The Beige Book suggested the economy continued to grow slowly in the past few months, with new weaknesses in manufacturing but increased strength in car and home sales.

The Commerce Department’s report said the economy grew at an annual pace of 1.7 percent in the second quarter, up from a previous estimate of 1.5 percent.

“The U.S. recovery continues, but remains disappointing. The economy is expanding, but not quickly enough to bring down the unemployment rate,” economists at PNC Bank said Wednesday in a research report.

The unemployment in July remained at 8.3 percent.

If the Fed takes any action next month, many economists say it is likely to extend its plan to keep interest rates near zero through late 2014.

The Fed may move the guidance to late 2015.

A previous analysis by Fed economists suggests that such an action would bring unemployment to about 7.8 percent by the end of the year and 7.2 percent by the end of next year, only slightly lower than it otherwise is projected to be.

A more aggressive action would involve launching a new round of bond purchases, most likely involving Treasury bonds and mortgage bonds. This would flood money into the economy and housing market, pushing record-low interest rates even lower.

Independent economists have estimated that a new round of bond purchases might reduce the unemployment rate by 0.2 percentage points over the course of a year.

Bernanke has said several times lately that Fed policies are no “panacea” for the economy. Still, some Democrats have urged him to do more and complained when the Fed stood pat at its midsummer meeting.

The “Fed should not be deterred from doing what’s needed to reduce unemployment,” Sen. Charles E. Schumer (D-N.Y.) said in a statement at the time.

Republicans, however, are opposed to new action, saying it risks inflation. Senate Banking Committee member Bob Corker (R-Tenn.) lashed out Tuesday at Bernanke in the pages of the Financial Times, saying the Fed shouldn’t provide any more stimulus.

“It would be helpful to have a Fed chairman who acted with a greater sense of humility about what monetary policy can achieve,” Corker wrote.

Bernanke himself says the country’s main economic decisions are Congress’s to make. He also wants to make sure the Fed doesn’t act in a way that sparks inflation, which can erode incomes.

At Jackson Hole this weekend, however, the absence of another top central banker underscores one of the most immediate threats to the recovery.

At the last moment, European Central Bank chief Mario Draghi scuttled a speech at the conference so he could stay at home and tend to the continent’s highly volatile financial crisis.

Zachary A. Goldfarb is a staff writer covering the White House, focusing on President Obama’s economic, financial and fiscal policy.
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