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Business Title: Bernanke: Fed Prepared to Take Action to Boost Growth Federal Reserve Chairman Ben S. Bernanke said the central bank stands ready to take additional steps to boost U.S. growth and cautioned lawmakers against budget moves that would harm a “sluggish” recovery. The Fed “will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability,” Bernanke said today in testimony to Congress’s Joint Economic Committee in Washington. The remarks signal Bernanke may not be finished after attempts in August and September to strengthen record monetary stimulus with unconventional tools. The central bank’s near-zero benchmark interest rate and $2.3 trillion of housing and government-debt purchases since 2008 have failed to produce self-sustaining growth in the economy and employment. Lawmakers on the separate bipartisan congressional supercommittee charged with seeking $1.5 trillion in deficit reduction by Nov. 23 would take a “substantial step” by accomplishing that goal, Bernanke, 57, said in prepared remarks. At the same time, “more will be needed to achieve fiscal sustainability,” he said. “A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery,” Bernanke said. “Putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term,” he said, without being more specific. They were Bernanke’s first detailed comments on the economic outlook and monetary policy since his decision Sept. 21 to adopt the so-called Operation Twist, replacing $400 billion of Treasuries in the Fed’s portfolio with longer-term securities in a move aimed at further reducing borrowing costs and helping lower unemployment. The program “should put downward pressure on longer-term interest rates and help make broader financial conditions more supportive of economic growth than they would otherwise have been,” Bernanke said in the testimony. Policy makers also decided to reinvest maturing housing debt into mortgage-backed securities, a move Bernanke said should “contribute to a stronger economic recovery” by “helping to support mortgage markets.” The U.S. jobless rate was 9.1 percent in August and has been stuck at 9 percent or higher for five months. Employers added zero jobs to payrolls in August, down from 85,000 in July, according to the Labor Department. Sustained payroll increases of around 150,000 a month are needed to bring unemployment down about half a percentage point over a year, according to Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead,” Bernanke said today. He also said that the “pattern of sluggish growth” in the economy “was particularly evident in the first half.” The economy expanded at a 1.3 percent annual pace in the second quarter after a 0.4 percent rate in the first three months of the year, according to the Commerce Department. Analysts surveyed by Bloomberg last month projected a 1.8 percent rate of growth in the third quarter, based on the median estimate. “The recovery from the crisis has been much less robust than we had hoped,” Bernanke said. Fed officials expect a “somewhat slower pace of economic growth over coming quarters” than they did in June, he said, without giving a specific forecast. Stocks pared losses after Bernanke’s comments. The Standard & Poor’s 500 Index fell 1.5 percent to 1,083.21 at 10:23 a.m. in New York. The yield on the 10-year Treasury note fell two basis points to 1.74 percent. U.S. stocks last week finished their worst quarter since the financial panic of 2008, burdened by concerns over a potential Greek debt default and chances the U.S. will relapse into recession. The Standard & Poor’s 500 Index dropped 14 percent through Sept. 30. Yields on 10-year Treasuries have risen from a record 1.67 percent on Sept. 23. Still, the difference between yields on 10- year and 30-year Treasuries has narrowed to less than 1 percentage point for the first time since July 2010. The Federal Open Market Committee, in a statement accompanying last month’s 7-3 vote on Operation Twist, cited “significant downside risks to the economic outlook, including strains in global financial markets.” Bernanke acknowledged “bouts of elevated volatility and risk aversion in financial markets” on investor concern over debt in the U.S. and abroad. While “European leaders are strongly committed to addressing” their debt crisis, fiscal issues still “pose ongoing risks to growth,” he said. U.S. growth “remains slow,” the FOMC’s statement said. A report yesterday showed American manufacturing accelerated in September as production picked up. The Institute for Supply Management’s factory index was 51.6 last month, the highest since June while below this year’s peak of 61.4 in February. Bernanke said faster inflation this year “does not appear to have become ingrained in the economy” and cited a recent decline in what traders expect for inflation in five to 10 years. The FOMC said inflation “appears to have moderated since earlier in the year” as prices of energy and some commodities have fallen. The Fed’s preferred price index, which excludes food and fuel costs, rose 1.6 percent in August from a year earlier, up from 1 percent in March. The housing market, which the Fed said is “depressed,” is showing little sign of rebounding even with a record-low average 4.01 percent interest rate on the 30-year fixed-rate mortgage. The annual pace of new-home sales in August was 295,000, just above the record-low rate of 278,000 in August 2010. That’s less than one-fourth of the 1.39 million pace in July 2005. Housing, which had been a “significant driver of recovery from most recessions” in the U.S. since World War II, is now among industries contributing to the “slower-than-expected rate of expansion,” Bernanke said. Sixty percent of respondents to last week’s quarterly Bloomberg Global Poll of 1,031 investors, analysts and traders see the U.S. economy deteriorating, and 50 percent said it will relapse into recession in the next year. Fed Governor Sarah Bloom Raskin, who’s backed Bernanke’s easing actions since joining the central bank a year ago, said last week that while the effects of Fed actions have been “somewhat more muted than I might have expected,” that shouldn’t imply that additional easing “would be unhelpful.” Bernanke said today that “monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy.” “Fiscal policy is of critical importance,” he said. “But a wide range of other policies -- pertaining to labor markets, housing, trade, taxation, and regulation, for example -- also have important roles to play.”
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