But Bernanke, whom markets turn to as a purveyor of economic wisdom, said the Fed had no solid answers as to why, two years into an economic recovery, growth keeps disappointing.
“We don’t have a precise read on why this slower pace of growth is persisting,” Bernanke said in a news conference Wednesday afternoon. He suggested that problems in the financial sector and the housing market, and with consumers trying to pay down their debt, had been underestimated. “Some of these head winds may be stronger or more persistent than we thought.”
Even as the central bank’s leaders lowered their expectations for the days immediately ahead, a different set of government economists offered a dire long-term forecast for the federal government’s fiscal health. The nonpartisan Congressional Budget Office estimated that the rising cost of Medicare, Medicaid and Social Security would, if left unchecked, lead to a national debt twice as big as the economy.
The CBO report highlighted the quandary confronting the United States: a weak economy in the near term and huge deficits in the longer run. Bernanke on Wednesday cautioned against conflating the two problems.
“Our budgetary problems are very long-run in nature,” said the Fed chairman, noting that the CBO projections go to 2025 and beyond. “That doesn’t mean we should wait to act. The sooner we can act, the better. But the most efficient and effective way to address our fiscal problems . . . is to take a long-run perspective, not to focus the cuts heavily on the near term.”
The Fed left its policy of ultra-low interest rates unchanged and will continue to hold massive amounts of securities in a bid to foster growth. But it confirmed Wednesday that it will let its policy of buying $600 billion in Treasury bonds expire at the end of this month, as has long been the plan. That brings to an end the controversial round of quantitative easing — or QE2, as it became known — enacted in November to boost the economy.
Extending the old metaphor that the role of a central bank is to take away the punch bowl just when the party gets good, economists at Bank of America Merrill Lynch wrote that “with so many parts of the economy like somber wallflowers, the Bernanke-led Fed is keeping the punchbowl filled but not spiking the drinks any further at this time.”
That’s because not all economic arrows are pointing in the wrong direction.
“The situation is different today than last August,” when the Fed began considering what became the QE2 policy, Bernanke said, in that inflation is higher and job growth is stronger, though employment weakened a bit in May.