Fed Chairman Bernanke forecasts a sluggish recovery

Federal Reserve Chairman Ben Bernanke waits to speak during a discussion hosted by The Economic Club of Washington, Monday, Dec. 7, 2009, in Washington. (AP Photo/Haraz N. Ghanbari)
Federal Reserve Chairman Ben Bernanke waits to speak during a discussion hosted by The Economic Club of Washington, Monday, Dec. 7, 2009, in Washington. (AP Photo/Haraz N. Ghanbari) (Haraz N. Ghanbari - AP)
By Neil Irwin
Washington Post Staff Writer
Tuesday, December 8, 2009

The economy is likely to expand moderately in 2010, Federal Reserve Chairman Ben S. Bernanke said Monday, but his guardedly optimistic assessment for growth contained no hints that the central bank is looking to raise interest rates anytime soon.

"Economic forecasts are subject to great uncertainty, but my guess is that we will continue to see modest economic growth next year," Bernanke told the Economic Club of Washington in a speech. That growth, he said, would be "sufficient to bring down the unemployment rate, but at a slower pace than we would like."

But Bernanke also laid out the factors that could limit the recovery, suggesting that he still sees plenty of risk factors threatening the economy's performance. "The economy confronts some formidable headwinds that seem likely to keep the pace of expansion moderate," he told the group of Washington-area business leaders, ticking off tight credit conditions, the weak job market and Americans' reluctance to spend money when they fear for their job security.

He also showed little concern about inflation rearing its head, either now or in the future. Answering the question of whether Fed actions will lead to higher inflation, he said point blank: "The answer is no; the Federal Reserve is committed to keeping inflation low and will be able to do so." He added that "inflation could move lower from here."

With his forecast of a sluggish recovery, description of continuing economic challenges and subdued talk about inflation, the comments suggest that Bernanke is in no hurry to raise interest rates or take other aggressive action to end the Fed's support for economic growth. A better-than-expected employment report on Friday led to some speculation in financial markets that the Fed could move sooner than thought to raise its target interest rate above its current near-zero level or take other steps to drain the money it has pumped into the financial system.

Indeed, in a question-and-answer period, Bernanke was asked about plans for interest rates. "Well, they can't go much further down," he said with a smile.

He elaborated some, discussing the Fed's policymaking committee meeting next week, which is likely to address the evidence of an improving economy and whether to change language in statements from recent meetings that the central bank will keep rates low for "an extended period."

"Right now we are still looking at the extended period," Bernanke said Monday. He added: "Obviously, there's been some signs of strength recently. We'll want to factor that in as we talk about this next week."

In a lighter moment, David Rubenstein, co-founder of the Carlyle Group and Economic Club president, asked: "What is the best thing about being chairman of the Federal Reserve Board?"

The answer: "I get to go through the security lines at the airport much more quickly."

Separately, Federal Reserve Bank of New York President William C. Dudley suggested in a speech that the Fed should be more proactive than it has been in trying to fight asset bubbles. The Fed failed to take action to curtail the rise of a giant stock market bubble in the late 1990s and the housing and credit bubbles of the 2000s, both of which led to recessions.

Speaking at Columbia University, Dudley said that "it might be appropriate" for the Fed and other regulators "to monitor and limit the buildup in leverage at the major securities firms and the leverage extended from these firms to their clients and counterparties" as a tool to rein in the excessive lending that often accompanies financial bubbles.

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