Bernanke Says Reduced Bank Lending, Labor `Headwinds' Restraining Growth
Nov. 16 (Bloomberg) -- Federal Reserve Chairman Ben S.Bernanke said economic “headwinds” of reduced bank lending anda weak labor market will probably restrain the pace of the U.S.economic recovery, warranting continued low borrowing costs.
“Significant economic challenges remain,” Bernanke saidin a speech today to the Economic Club of New York. “The flowof credit remains constrained, economic activity weak andunemployment much too high. Future setbacks are possible.” Headded that the Fed is “attentive” to changes in the dollar’svalue and “will help ensure that the dollar is strong.” Afterhis comments the currency pared its loss against the euro.
The central bank chief gave no indication he favors raisinginterest rates anytime soon. Bernanke repeated the key sentencefrom the Nov. 4 statement of Fed policy makers, who reiteratedthat interest rates will stay very low for an “extendedperiod” as the central bank seeks to maintain a recovery fromthe deepest recession since the 1930s.
“Of course, significant changes in economic conditions orthe economic outlook would change the outlook for policy aswell,” Bernanke said in Manhattan in his first talk since theFed’s Open Market Committee met this month. The Fed has a “widerange of tools” for tightening credit “when the economicoutlook requires us to do so,” he said.
A government report today showed October retail sales inthe U.S. rose 1.4 percent, more than anticipated, as demand forautos climbed, easing concern households will curtail spendingafter government incentives ended. A report from the FederalReserve Bank of New York today showed manufacturing in theregion expanded in November for a fourth straight month.
Stocks Advance
U.S. stocks pared gains, with the Standard & Poor’s 500Index rising 1.5 percent to 1,109.51 at 12:38 p.m. in New York.Treasuries extended gains, pushing the yield on the 10-year notedown seven basis points, or 0.07 percentage point, to 3.35percent.
The dollar, which traded at $1.4969 against the euro beforethe speech, strengthened after its release to as high as$1.4891.
The Fed, while trying to pull the economy from therecession, has held the benchmark lending rate close to zerosince December while using asset purchases as its main policytool. The $1.4 trillion in purchases of housing debt are set toend in March, while the Fed completed buying $300 billion ofTreasuries in October.
Economic Growth
The unprecedented monetary stimulus helped fuel a 3.5percent pace of growth during the third quarter. Economistsexpect an expansion of 2.6 percent next year and 3 percent in2011, the median estimates in a Bloomberg News survey offorecasters this month. Fed policy makers gave updated economicprojections at the last FOMC meeting, which will be releasedNov. 25 as part of minutes of the session.
“I expect moderate economic growth to continue nextyear,” Bernanke said, without giving a specific forecast.Demand is showing “signs of strengthening,” and housing, evenwith “important problems” such as foreclosures, may “become asmall positive for growth” in 2010, he said.
Bernanke devoted the majority of his speech to bank lendingand the labor market, saying they are “two of the principalfactors that may constrain the pace of the recovery.”
Reluctance to Lend
“Banks’ reluctance to lend will limit the ability of somebusinesses to expand and hire,” Bernanke said. “I expect thissituation to normalize gradually, as improving economicconditions strengthen bank balance sheets and reduceuncertainty; the fallout for banks from commercial real estatecould slow that progress, however.”
The Fed said last week that U.S. banks kept tighteninglending standards for companies and consumers last quarter,reinforcing the central bank’s decision to leave its benchmarkinterest rate at record lows for a long time. At the same time,the number of banks making it tougher to borrow diminished, theFed said in its quarterly Senior Loan Officer survey.
Bernanke said the labor market is an “area of greatconcern.” The U.S. jobless rate rose to 10.2 percent inOctober, the first time it’s exceeded 10 percent since 1983, andan additional 190,000 cuts from payrolls brought job losses to7.3 million since the recession began in December 2007.
“Jobs are likely to remain scarce for some time, keepinghouseholds cautious about spending,” Bernanke said. “As therecovery becomes established, however, payrolls should begin togrow again, at a pace that increases over time.”
To contact the reporter on this story:Scott Lanman in Washington at slanman@bloomberg.net;Michael McKee in New York at mmckee@bloomberg.net.
Last Updated: November 16, 2009 12:42 ESTSource: Bloomberg
