Investors and Wall Street economists have predicted that the worrisome economic signs would make the Fed more likely to act at its policymaking meeting in a little less than two weeks. But Bernanke declined to offer guidance.
“The key question we’ll be facing is: Will economic growth be sufficient to achieve continued progress in the labor market?” Bernanke said. “My colleagues and I are still working on our own assessments.”
The Fed has been perplexed by the economy. At the start of the year, it expressed confusion about the unusually robust pace of job creation. Now, it is surprised by the dramatic slowdown in hiring.
Economists generally agree on one factor behind the burst of hiring at the beginning of the year: unseasonably warm winter weather. Another factor may be the fact that companies laid off so many workers during the recession and needed to refill their ranks.
“The deceleration in employment in recent months may indicate that this catch-up has largely been completed,” Bernanke said, “and, consequently, that more rapid gains in economic activity will be required to achieve significant further improvement in labor market conditions.”
The Fed has long said that if the economy weakened enough that the unemployment rate was unlikely to come down in a timely manner, it would be prepared to resume its four-year-old campaign of economic stimulus.
“Bernanke took a consensus-building tone regarding upcoming monetary policy decisions, offering that nothing has been decided regarding future actions,” said JPMorgan Chase chief U.S. economist Michael Feroli. “Even so, his description of the outlook . . . leaves the door wide open for the Fed to engage in further accommodative measures.”
In his remarks, Bernanke said the Fed would also step in if the financial crisis in Europe deteriorates significantly, posing risks to the U.S. financial system.
“As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate,” he said.
Bernanke devoted a major segment of his opening testimony to his concerns about the looming “fiscal cliff” — the series of tax hikes and deep spending cuts set to take effect in January if Congress does not forge a new budget agreement. Many economists say the magnitude of those actions would tip the economy back into recession.
Bernanke said it was critical for lawmakers “to avoid unnecessarily impeding the current economic recovery. Indeed, a severe tightening of fiscal policy at the beginning of next year that is built into current law — the so-called fiscal cliff — would, if allowed to occur, pose a significant threat to the recovery.”
He added, “Uncertainty about the resolution of these fiscal issues could itself undermine business and household confidence.”
The Fed has two legal objectives: keeping as many people as possible employed and keeping prices stable. It has lately failed to meet the first objective, with the unemployment rate above 8 percent, while it has largely succeeded at the second. Inflation has run about 2 percent per year, in line with what economists consider healthy for a growing economy.
If the Fed decides to try to boost growth, a range of actions is possible. A modest step could involve the Fed simply saying it is committed to keeping interest rates low for several more years or exchanging short-term securities it owns for longer-term securities, thus bringing down long-term interest rates.
A more dramatic approach would involve purchases of additional securities — Treasury bonds and mortgage assets — and would suggest that the Fed is deeply concerned about the path of recovery and wants to flood the economy with more money to support growth.