Bernanke warns Congress: Growth, jobs front too weak
By Neil Irwin,
Federal Reserve leaders have downgraded their expectations for economic growth, Chairman Ben S. Bernanke said Tuesday and called on Congress to address both long-term budget deficits and the short-term economic troubles.
The Fed chief, testifying before the Joint Economic Committee, urged Congress to avoid actions that might “impede the ongoing economic recovery” while simultaneously putting in place a plan to reduce future deficits over time, adding that “the federal budget is clearly not on a sustainable path at present” and that the deficit reduction targets that the so-called supercommittee of Congress is charged with meeting will not be enough to make the nation’s finances sustainable.
Bernanke also signaled that the Fed will consider further action if the economy continues to worsen. The Fed’s policy committee “will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability,” he said.
The warning to lawmakers came as the Fed chief acknowledged the weak recovery and delivered a dour outlook on the economy.
“Overall, the recovery from the crisis has been much less robust than we had hoped,” Bernanke said. He said that the Fed’s policymaking committee “now expects a somewhat slower pace of economic growth over coming quarters” than it did in June, when it last released formal projections.
The Fed chief offered little optimism on the jobs front, saying that “recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth” ahead.
The Fed took new action two weeks ago to try to boost the ailing economy, pledging to shift $400 billion of its bond holdings out of shorter-term bonds and into longer-term bonds in order to reduce mortgage and other long-term borrowing rates. Bernanke said that action “should help make broader financial conditions more supportive of economic growth than they otherwise would have been,” but also added that “monetary policy can be a powerful tool, but . . . is not a panacea for the problems currently faced by the U.S. economy.”
Bernanke argued that financial instability — driven in part by the contentious U.S. fiscal debate and the ongoing debt crisis in Europe — has been a factor holding back the recovery. The debate over the debt ceiling in July and August and downgrade of the U.S. credit rating “contributed to the financial turbulence that occurred around that time,” he said. While it’s hard to judge how much the turbulent financial markets have affected the economy, he added, “there seems little doubt that they have hurt household and business confidence, and that they pose ongoing risks to growth.”
Indeed, Bernanke’s message on fiscal policy also urged Congress to try to “improve the process” for making budget decisions, “to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy.”
The Fed chief cited several reasons for the disappointing economic results — some of them temporary, such as the impact of Japan’s earthquake in the spring on automobile production — but others more lasting. The housing sector has not been contributing to growth the way it does in most economic recoveries. Households have been cautious on spending. “Probably the most significant factor depressing consumer confidence,” Bernanke said, “has been the poor performance of the job market.”