The increase was all the more surprising because only hours earlier the Commerce Department had lowered its estimate of economic growth for the second quarter. By the latest reading, the economy grew at a meager 1 percent annual rate in the quarter, down from an initial estimate of 1.3 percent. This means the economy barely advanced in the first half of the year; first-quarter growth was an even lower rate of 0.4 percent.
In his speech, Bernanke conceded that the recovery has been slower than expected but devoted only one paragraph to policy responses. The Fed “has a range of tools that could be used to provide additional monetary stimulus.” But he didn’t say what they are or whether they might be used. All he said was that the Fed’s policymaking committee would discuss them in September. The most powerful would be the purchase of Treasury bonds ( “quantitative easing,” which would be called QE3), despite skepticism that the last such program (QE2) had much effect.
There were, perhaps, three news nuggets in the speech.
First, Bernanke suggested that he’s hostile to proposals by some economists that the Fed generate higher inflation to spur the recovery. Higher inflation, the argument goes, would erode the “real” value of existing debts and, thereby, make it easier for consumers to spend more. Without mentioning this argument, Bernanke said that monetary policy that keeps “inflation ... low and stable over time” encourages economic growth by allowing “households and businesses to plan for the future” without having to worry about erratic price fluctuations.
Second, Bernanke implied that he could support a temporary economic stimulus -- bigger budget deficits created by more spending or tax cuts -- even though he favors closing long-term budget deficits. The two goals, he argued, “are not incompatible.” Congress and the White House could agree on a “credible plan for reducing future deficits” while acknowledging that a headlong rush toward deficit reduction now might create “headwinds for the current recovery.”
Finally, he urged — though providing no specifics — Congress to find new ways to settle budget differences without replaying this summer’s brinkmanship over raising the federal debt ceiling. Similar future confrontations could wreck confidence in the economy, especially the “willingness of investors around the world to hold U.S. financial assets or to make direct investment in job-creating U.S. businesses.”