Bernanke says economy still needs stimulus

Bernanke says economy still needs stimulus

Federal Reserve Chairman Ben Bernanke Monday gave no indication that he is ready to ease off the pedal in his aggressive policy support for the recovery, again pointing to a jobs market that has yet to show any substantive improvement.

“We are still in a relatively fragile recovery,” Bernanke noted during a discussion at the University of Michigan’s Ford School of Public Policy.

“I want to be clear that, while we’ve made some progress, that there’s still quite a ways to go before where we’d be satisfied,” he said.

The labor market, for one, “is still not where we’d like it to be,” the chairman added.

Still, Bernanke said he believed conditions in the U.S. economy “are moving in the right direction,” and that he is “cautiously optimistic” about the next couple of years.

Asked to comment on the progress being made by the Fed’s latest bond buying program — $45 billion a month in longer term Treasuries, $40 billion a month in mortgage securities — Bernanke noted that “so far, we think we are getting some effect,” but it is still early days.

Bernanke said the central bank has found asset purchases to be an effective tool, but will continue to assess “how effective” it is.

“It’s possible that as you move through time and a situation changes, that the impact of these tools could vary,” he said.

Going forward, Bernanke said the Fed will monitor the impact of the current asset purchase program on financial market conditions and how that translates to a boost to the labor market situation.

He noted that there has been some “modest” improvement in the latter, describing the drop in the unemployment rate to 7.8% as “fairly significant.”

“But we would like to see a stronger labor market,” Bernanke continued.

Arguing that the unemployment rate remains “quite high,” and is coming down very slowly, Bernanke said an aggressive response by the Fed is warranted as there are still too many long-term unemployed Americans whose skills and talents are being wasted.

Bernanke dismissed the fears of some that the Fed’s actions will spark significant inflation.

“Personally, I don’t see much evidence of that,” he said. “Inflation expectations remain quite well-anchored.”

More importantly, Bernanke said the Fed has all the tools required to withdraw its monetary policy stimulus before inflation becomes a problem.

Still, price stability is one half of the Fed’s dual mandate, and Bernanke assured that the central bank will pay close attention to keep inflation well-contained.

With regard to the wider economy, Bernanke said the current growth pace is moderate, although there are some optimistic signs emerging.

The housing sector, for example, is one positive factor “that’s going to help us have, I hope, a better year in 2013 and 2014,” he said.

Elsewhere, state and local governments are in better condition compared a few years ago, Bernanke said, meaning they will not be a drag on the economy this time around.

Finally consumers are more optimistic, he noted.

“As long as the fiscal policy thing isn’t getting too messed up, the consumer seems to be a little bit more upbeat,” Bernanke said.

He said that even with the fiscal cliff agreement, U.S. fiscal policy remains “fairly restrictive,” and noted estimates that federal fiscal policy will subtract around one to 1 1/2 percent from real GDP growth this year. `

While there is still more work to be done, Bernanke said the deal to avert the fiscal cliff reached by lawmakers at the beginning of the year eliminated “a good bit” of the restrictive components in the combination of expiring tax reliefs and sharp spending cuts that would have had adverse effects on the economy.

However, the country is not out of the woods yet, the Fed chairman warned, pointing to other approaching critical “fiscal watersheds” that lawmakers must address; namely the finding of the government, the postponed sequester and the approaching deadline date for the debt limit.

It is “very, very important” that Congress raise the debt ceiling he said, or else the nation’s credit rating will again be at risk of a downgrade.

Source: Market News International