The recent slowdown in the U.S. economy is being driven by temporary factors, and growth is likely to accelerate later in the year, Federal Reserve Chairman Ben S. Bernanke said Tuesday.
The Fed chairman gave no indication that signs of economic weakness over the past few weeks, including a disappointing report on the job market Friday, will lead the central bank to consider new steps to try to boost growth, such as a third round of injecting billions into the economy by buying Treasury bonds.
Rather than suggest the Fed might ease its monetary policy further — a controversial program announced in November is set to expire this month — Bernanke in effect argued that the things holding back the U.S. economy will not be fixed by the central bank printing even more money.
“The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional head winds ranging from the effects of the Japanese disaster to global pressures in commodity markets,” Bernanke said at the International Monetary Conference in Atlanta. “In this context, monetary policy cannot be a panacea.”
William C. Dudley, president of the Federal Reserve Bank of New York, gave a separate speech Tuesday evening that articulated a related idea — that the United States needs fundamental, structural changes to make the economy poised for stronger growth.He was a strong internal advocate of earlier rounds of bond purchases, or quantitative easing, but in Tuesday’s speech did not advocate for expanding that strategy.
“We, as a nation, have to take steps that facilitate the needed structural adjustment of U.S. economic activity that will position us to thrive in the next chapter of global economic transformation,” Dudley said at the Foreign Policy Association Corporate Dinner in New York. “We need to make sure that the next business cycle will be more sustainable than the last, which was built on an unstable foundation of asset price gains, easy credit and outsized financial-sector profits.”
Both speeches reflect a growing sense within the Federal Reserve that the central bank has done about all it can to try to support the economy. The Fed’s main policy tool of monetary policy can help economic growth by making more money available to households and businesses to borrow at cheaper interest rates; by keeping prices for other assets, such as the stock market, high; and by decreasing the value of the dollar on international currency markets.
By those measures, the economy should be doing great. Banks and corporations are sitting on trillions of dollars in extra cash, interest rates are low for all sorts of borrowers and stock prices have risen steadily for nine months. The Fed’s strategy of keeping its target interest rate near zero and buying $600 billion in bonds, expiring in June, has worked in some narrow sense but hasn’t been enough to create jobs in any large numbers.
That being the case, Fed officials are unconvinced that the tools they have available, such as a third round of bond purchases, or QE3, would create meaningful economic improvement.
That's not to say they are crowing about the economic situation.
“U.S. economic growth so far this year looks to have been somewhat slower than expected,” Bernanke said in his comments. “A number of indicators also suggest some loss of momentum in the labor market in recent weeks.”
But Bernanke said he views the causes as partly temporary, suggesting that momentum will accelerate as the year progresses. “With the effects of the Japanese disaster on manufacturing output likely to dissipate in the coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up in the second half of the year.”
The economic recovery is proceeding at a rate that is “frustratingly slow from the perspective of millions of unemployed and underemployed workers,” he said.
Bernanke did offer a warning — that seemed to be aimed at some Republicans in Congress — that cutting federal spending too quickly could undermine growth.
“If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory,” he said. “But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery.”