Federal Reserve Chairman Ben S Bernanke said the “frustratingly slow” US recovery warranted sustained monetary stimulus while predicting that growth would gain speed in the second half of the year.
“The economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed,” Bernanke said yesterday in a speech in Atlanta. At the same time, the Fed “will take whatever actions are necessary to keep inflation well controlled”, he said.
Bernanke said consumer spending was being held back by an unemployment rate that rose to 9.1 per cent last month, a drop in home values and tight credit. Growth was likely to pick up as fuel prices moderated and factory disruptions eased, as factories in Japan recovered from an earthquake and tsunami, he said. Stocks and bonds fell as some investors interpreted the comments as a signal that the Fed was unlikely to deploy a new round of bond purchases to bolster the economy.
“He’s saying monetary policy is on course and right on, and there’s no need to change at this point,” said Sung Won Sohn, an economics professor at California State University, Channel Islands, and former chief economist at Wells Fargo & Co. “The implication is not only will there be no change, but a third round of quantitative easing is not likely to come,” he added.
Treasury two-year note yields dropped two basis points, or 0.02 percentage point, to 0.4 per cent yesterday in New York, the lowest level this year. The Standard & Poor’s 500 Index fell 0.1 per cent to 1,284.94 after rallying as much as 0.8 per cent.
‘Frustratingly slow’
“Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers,” Bernanke said.
Bernanke has spurred growth by holding the main interest rate near zero since December 2008 and expanding the Fed’s balance sheet to $2.79 trillion. The Federal Open Market Committee said in April it will complete a program to purchase $600 billion in bonds this month, a policy known as quantitative easing, and affirmed a pledge to keep interest rates low for an “extended period.”
William C Dudley, president of the Federal Reserve Bank of New York and vice-chairman of FOMC, said in a separate speech “the recovery remains distinctly subpar in spite of aggressive monetary and fiscal stimulus”.
Bernanke and Dudley both said lawmakers should rein in Budget deficits to ensure long-term growth without cutting back so quickly as to choke off the recovery.
‘Credible plan’
“Establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates,” Bernanke said. On the other hand, “a sharp fiscal consolidation focused on the very near term could be self-defeating”, he added.
While a recent increase in inflation is a “concern”, Bernanke said yesterday he did not see “much evidence that inflation is becoming broad-based or ingrained in our economy”.
Still, “the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability”, he said. The Fed “will take whatever actions are necessary to keep inflation well controlled”.
The personal consumption expenditures price index, minus food and energy, rose 1 per cent for the 12 months ending April. That’s below the longer-run inflation goal of 1.7 per cent to 2 per cent for the PCE index forecast by policy makers in April.
‘Fully committed’
The Fed was “fully committed” to maintaining the dollar’s purchasing power and to keeping inflation in check, Dudley said during his speech.
The breakeven rate for five-year Treasury Inflation Protected Securities, the yield difference between the inflation-linked debt and comparable maturity Treasuries, has fallen to 2.05 percentage points from 2.47 percentage points on April 29.
Breakeven rates are a measure of the outlook for consumer prices over the life of the securities. The measure has climbed from 1.24 points on Aug. 27, the day Bernanke signalled the Fed might embark on a second round of large-scale asset purchases during a speech in Jackson Hole, Wyoming.
If commodity prices stabilise, “the upward impetus to overall price inflation will wane and the recent rise in inflation will prove transitory”, Bernanke said in yesterday’s speech. Inflation is being restrained by “the stability of longer-term inflation expectations”, he said.
Loss of momentum
Bernanke said recent data on the labour market showed a “loss of momentum”. He cited last week’s payrolls report, which showed that companies added 83,000 workers, down from 268,000 the month before.
Households were facing “significant headwinds”, Bernanke said, such as higher prices for food and energy, declining home values and still-high unemployment.
Oil prices had climbed 160 per cent since February 2009, while non-fuel commodity prices gained about 80 per cent, Bernanke said. The increase in commodity prices reflected “strong gains in global demand that have not been met with commensurate increases in supply”, he said.
The chairman rejected criticism that the Fed’s actions have pushed down the foreign exchange value of the dollar, and thereby boosted the price of commodities, saying “many factors other than monetary policy affect the value of the dollar”.
