Bernanke Sees 'Formidable Headwinds' for US Economy
Dec. 7 (Bloomberg) -- Federal Reserve Chairman Ben S.Bernanke said the U.S. economy faces “formidable headwinds,”including a weak labor market and tight credit that are likelyto produce a “moderate” pace of expansion.
“The economy confronts some formidable headwinds that seemlikely to keep the pace of expansion moderate,” Bernanke, 55,said today in a speech to the Economic Club of Washington. Hesaid inflation remains “subdued” and might even move lower.
Stocks rose and the dollar erased its gain against the euroafter Bernanke’s comments as traders pared bets the Fed willraise interest rates from a record low in August. Bernanke, inresponse to a question after his speech, repeated the Fed’sstatement that interest rates are likely to remain low for an“extended period.”
The Standard & Poor’s 500 Index was up 0.3 percent to1,109.64 at 1:40 p.m. in New York. The dollar was little changedat $1.4871 per euro after rising as much as 0.7 percent.
“The nation’s chief economist just gave a big thumbs downon the hopes for a V-shaped recovery,” said Christopher Rupkey,chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd.in New York. “Bernanke is saying it will take a long time toput the unemployed back to work.”
Cut Fewest Jobs
Payrolls have declined by than 7.2 million jobs since thestart of the recession. Employers cut the fewest jobs inNovember since the recession began in December 2007, and theunemployment rate unexpectedly fell, a Labor Department reportshowed last week. Payrolls declined by 11,000, and the joblessrate fell to 10 percent in November from 10.2 percent theprevious month.
In response to a question from the audience about thedirection of interest rates, Bernanke said: “Right now we arestill looking at the extended period given that conditionsremain low rates of utilization, subdued inflation trends, andstable long-term inflation expectations.”
‘Some Signs’
“Obviously there has been some signs of strength recently,we will want to factor that in as we talk about this nextweek.”
U.S. central bankers meet for their final two-day meeting ofthe year on Dec. 15-16. At their last meeting in November,policy makers repeated their pledge to keep interest rates verylow for an “extended period.”
“Despite the general improvement in financial conditions,credit remains tight for many borrowers,” and the job market“remains weak,” Bernanke said in his prepared remarks.
The Fed chairman said the U.S. central bank has the toolsand commitment to keep price increases in check, and thatinflation could subside further.
“Elevated unemployment and stable inflation expectationsshould keep inflation subdued, and indeed, inflation could movelower from here,” Bernanke said. “The Federal Reserve iscommitted to keeping inflation low and will be able to do so.”
Back From ‘Brink’
The Fed chairman credited the U.S. central bank withpulling the economy “back from the brink,” and suggested thatgrowth is unlikely to be strong enough to lower unemployment ata rapid pace. The speech was his first since his appearance at aSenate Banking Committee hearing last week on his nomination toa second term.
“We still have some way to go before we can be assuredthat the recovery will be self-sustaining,” the Fed Chairmansaid. “My best guess at this point is that we will continue tosee modest economic growth next year -- sufficient to bring downthe unemployment rate, but at a pace slower than we wouldlike.”
The Fed has channeled liquidity to banks and markets forasset-backed securities and the commercial paper market, helpingto unfreeze bank funding markets. The London interbank offeredrate, or Libor, for three-month loans in dollars between bankswas 0.25 percent today, down from 1.42 percent at the start ofthe year.
Lowest Recorded
The central bank is also purchasing $1.25 trillion inmortgage-backed securities. Costs on 30-year fixed-ratemortgages fell to 4.71 percent Dec. 3, the lowest since mortgagebuyer Freddie Mac in McLean, Virginia, began compiling the datain 1971.
The Fed chairman cited the benefits of the central bank’sregional structure, saying it is “well suited” to be the leadregulator for supervising the largest financial institutions.
“No firm, by virtue of its size and complexity, should bepermitted to hold the financial system, the economy, or theAmerican taxpayer hostage,” Bernanke said. “All systemicallyimportant financial institutions, not only banks, should besubject to strong and comprehensive supervision on aconsolidated, or firm-wide, basis.”
Great Depression Buff
The former Princeton University scholar and self-describedGreat Depression buff is defending the central bank againstefforts in Congress to curtail its authority and independence.
A Senate proposal would remove bank supervision from theFed, and House legislation would increase oversight of monetarypolicy. Legislation pending in both chambers would limit theFed’s ability to lend to troubled institutions and remove thecentral bank’s rule-writing authority on consumer financialproducts.
The Fed chairman has prompted concern among lawmakers abouttaxpayer-sponsored bailouts and rescues that he says were usedonly to save households and the economy from financial collapse.
The House on Nov. 19 advanced a proposal to remove a three-decade ban on congressional audits of Fed interest-ratedecisions, a measure backed by Ron Paul, a Republican fromTexas.
To contact the reporter on this story:Craig Torres in Washington at ctorres3@bloomberg.net: Shobhana Chandra in Washington at +1- schandra1@bloomberg.net.
Last Updated: December 7, 2009 13:45 ESTSource: Bloomberg
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