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Fed Chief Calls Congress Biggest Obstacle to Growth Fed Chairman Reaffirms Economic Plan
(about 4 hours later)
WASHINGTON — The Federal Reserve’s chairman, Ben S. Bernanke, said Wednesday that Congress is the largest obstacle to faster economic growth, and he warned that upcoming decisions about fiscal policy could once again undermine the nation’s recovery. WASHINGTON — The Federal Reserve’s chairman, Ben S. Bernanke, sharpened his insistence Wednesday that the Fed remains committed to its economic stimulus campaign and that it did not intend to signal it was lowering its sights in recent weeks.
“The economic recovery has continued at a moderate pace in recent quarters despite the strong headwinds created by federal fiscal policy,” Mr. Bernanke said in the opening line of his prepared remarks to a Congressional committee. Mr. Bernanke said that the Fed expected the economy to gain strength in the coming months, potentially allowing the Fed to decelerate its stimulus campaign not because it has changed its goals but because it has begun to achieve them.
Moreover, he said, Congress could make things worse later this year. But he warned that Congress itself remains the greatest obstacle to faster growth. Federal spending cuts are reducing growth this year by about 1.5 percentage points, he said. While the Fed expects the impact to diminish next year, he said there was a risk Congress would create new problems for the economy.
“The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” he said. “The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” Mr. Bernanke said during a biannual appearance before the House Financial Services Committee.
The shabby condition of the economy has become a familiar background for Mr. Bernanke’s public appearances. Unemployment remains stubbornly common, inflation has sagged to the lowest pace on record and growth is tepid. Wednesday may have marked the last time that Mr. Bernanke will appear before the committee to report on the Fed’s conduct of monetary policy. He will conclude his second term as chairman at the end of January and is widely expected to step down. Members of both parties took the opportunity to praise him, although Republicans generally added that they opposed the Fed’s recent efforts.
These problems are the justification for the Fed’s efforts to stimulate the economy, and Mr. Bernanke said Wednesday, as he has before, that the Fed would continue those efforts until the indicators returned to more healthy levels. “You acted boldly and decisively and creatively – very creatively, I might add,” said the committee’s chairman, Texas Republican Jeb Hensarling.
In particular, he has adopted a stronger tone regarding the low pace of inflation since the last meeting of the Fed’s policy-making committee in June. Prices increased by just 1 percent during the 12 months that ended in May, well below the 2 percent pace that the Fed considers most healthy. “We will act as needed to ensure that inflation moves back toward our 2 percent objective over time,” he said. “You have never been boring,” said New York Democrat Carolyn Maloney.
The central bank has said it plans to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent. It also is expanding its holdings of mortgage-backed and Treasury securities by $85 billion a month in an effort to accelerate the pace of employment growth. Mr. Bernanke then did his very best to be boring, sending the message to markets that had been roiled by his comments last month that it was much ado about nothing.
This week may mark the last of Mr. Bernanke’s biannual appearances before Congress to report on the Fed’s conduct of monetary policy. He will conclude his second term as chairman at the end of January and is widely expected to step down. The shabby condition of the economy has become the constant background for Mr. Bernanke’s public appearances. Unemployment remains stubbornly common, inflation has sagged to the lowest pace on record and growth is tepid.
Mr. Bernanke’s likely departure means that his credibility increasingly depends on convincing investors that the rest of the Fed’s policy-making committee shares his views and is committed to maintaining the same policies even if he departs. Mr. Bernanke’s message Wednesday was that the Fed will begin to decelerate only if those problems continue to diminish. If unemployment stays high, the Fed will keep buying bonds. If inflation stays low, the Fed will keep buying bonds. If growth weakens, the Fed will keep buying bonds. Indeed, he revived a talking point from earlier this year in insisting that the Fed was willing to increase the volume of its monthly purchases if it decided that more stimulus was necessary.
That task has been complicated by the fragmentation of the committee’s views about asset purchases. About half of the 19 officials who participate in meetings of the Fed’s policy-making committee indicated before the committee’s most recent meeting last month that they expected an end to asset purchases later this year, while the rest – including Mr. Bernanke – see a need for purchases into 2014. “Because our asset purchases depend on economic and financial developments, they are by no means on a preset course,” Mr. Bernanke told the committee.
Mr. Bernanke made no mention of those differences in his remarks on Wednesday, instead depicting the committee as unified in its expectation that purchases would end in mid-2014, as long as the economy grows in line with the Fed’s forecast. Mr. Bernanke has adopted a stronger tone in particular on the subject of inflation. Fed officials insisted for much of the year that they were not concerned about the sagging pace of inflation, which has fallen to the lowest pace on record. Prices increased by just 1 percent during the 12 months that ended in May, well below the 2 percent pace that the Fed considers most healthy. In recent weeks, the Fed has shifted its tone, emphasizing that it wants prices to rise more quickly.
The first step would be a reduction in the pace of purchases later this year, he said. On Wednesday Mr. Bernanke put inflation alongside unemployment as the reasons for the Fed’s commitment to its stimulus campaign: “Our intention is to keep monetary policy highly accommodative for the foreseeable future,” he said, “because inflation is below our target and unemployment is quite high.”
But Mr. Bernanke emphasized that such a cut was not a foregone conclusion. The central bank says it plans to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent. It also is expanding its holdings of mortgage-backed and Treasury securities by $85 billion a month in an effort to accelerate the pace of employment growth.
Mr. Bernanke repeated his comments earlier this month that the Fed is considering “changing the mix of tools” by reducing the pace of asset purchases later this year, but at the same time suggesting it will extend the duration of near-zero rates. He said that this plan enjoyed “good support” from other Fed officials.
He also emphasized that such a cut was not a foregone conclusion.
“If the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions — which have tightened recently — were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer,” Mr. Bernanke said in his prepared remarks.“If the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions — which have tightened recently — were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer,” Mr. Bernanke said in his prepared remarks.
Mr. Bernanke downplayed concerns, however, that recent increases in interest rates, caused in part by his own comments about the course of Fed policy, would undermine economic activity. “Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates,” he said. His likely departure, however, means that his credibility increasingly depends on convincing investors that the rest of the Fed’s policy-making committee shares his views and is committed to maintaining the same policies even if he departs.
That task has been complicated by the fragmentation of the committee’s views about asset purchases. About half of the 19 officials who participate in meetings of the Fed’s policy-making committee indicated before the committee’s most recent meeting last month that they expected an end to asset purchases later this year, while the rest – including Mr. Bernanke – see a need for purchases into 2014.
The announcement last month that the Fed expects to reduce its asset purchases later this year drove up interest rates on mortgages and other loans. Some investors concluded that the Fed was curtailing its ambitions for the recovery, while others saw evidence that the Fed was overly optimistic in its forecasts.
Mr. Bernanke described that response as “unwelcome,” but he added that it had likely reduced some “excessively risky or leveraged positions” – easing concerns among some Fed officials that its efforts were seeding new bubbles.
He downplayed concerns that the recent rate increases had undermined economic activity. “Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates,” he said.