Even as he underlined the prominent part that Congress can play in fostering — or jeopardizing — the nation’s economic health, Bernanke gave no sign that the Fed, for its part, was preparing to take new steps to bolster the flagging recovery.
That reticence disappointed some investors and market observers, who had expected Bernanke to use the speech to signal new Fed moves to try to boost growth, such as resuming the purchase of vast sums of bonds to pump money into the economy.
Instead, Bernanke held back, saying the Fed will weigh policy changes that might help growth, and “employ its tools as appropriate.” But he did not enumerate those tools or indicate the likelihood they will be deployed soon.
A meeting of the Fed’s policy committee that had been scheduled for a single day next month will now last two, Bernanke said, to allow for a fuller discussion of the Fed’s policy options.
“He set the stage for a good, robust discussion at the September meeting, but did not give a promise of action,” said Randall Kroszner, a professor at the University of Chicago Booth School of Business and former Fed governor. “There are lots of problems right now, both domestically and internationally, but it is not at all obvious how you use monetary policy to fight them. The crystal ball is cloudy.”
The challenge facing policymakers was highlighted Friday when the Commerce Department reported that gross domestic product rose only 1 percent from April through June, less than the 1.3 percent first estimated. And recent days have bought fresh evidence that the industrial sector—one of the bright spots of 2011—contracted in August.
In his speech at the conference sponsored by the Federal Reserve Bank of Kansas City, Bernanke stressed the limits of the Fed’s monetary policy, such as setting interest rates, to remedy deep-seated problems in the U.S. economy. “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” he said.
In other words, the burden for solving the nation’s economic malaise rests with Congress and the Obama administration. Atop the agenda is agreeing on a program of government spending and taxation that that can support economic recovery while reducing federal deficits in years to come.
Bernanke’s harshest criticism centered on the often-bitter debt ceiling negotiations, when many Republican lawmakers threatened to let the government default unless the White House and Congress reached a deal to dramatically cut government spending. He said that “fiscal policymakers could consider developing a more effective process that sets clear and transparent goals, combined with budget mechanisms to establish the credibility of those goals.
While his call for a more businesslike approach in Washington would strike many Americans as stating the obvious, it was remarkable coming from the world’s most influential central banker.
“I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if—and I stress if—our country takes the necessary steps to secure that outcome,” he said.
Bernanke emphasized that cutting the deficit over the long run and continuing tax and spending policies that help the economy in the short run are not inconsistent.
“Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery,” he said.
In particular, he advocated for policies to address the high level of long-term unemployment, which includes those out of work for more than six months. He also gave a tacit endorsement to a overhaul of the tax code and policies to build infrastructure and support research.
While predicting that economic growth will pick up in the second half of the year, Bernanke cautioned, “This economic healing will take a while, and there may be setbacks along the way.”
But he remained optimistic about prospects over the long run for the U.S. economy. “The growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years,” he said.