WASHINGTON (MNI) – The following is the first of two parts of the
complete text of Federal Reserve Chair Ben Bernanke’s semi-annual
testimony to the House Financial Services Committee Wednesday:
Chairman Bachus, Ranking Member Frank, and other members of the
Committee, I am pleased to present the Federal Reserve’s semiannual
Monetary Policy Report to the Congress. I will begin with a discussion
of current economic conditions and the outlook and then turn to monetary
The Economic Outlook
The recovery of the U.S. economy continues, but the pace of
expansion has been uneven and modest by historical standards. After
minimal gains in the first half of last year, real gross domestic
product (GDP) increased at a 2-1/4 percent annual rate in the second
half.1 The limited information available for 2012 is consistent with
growth proceeding, in coming quarters, at a pace close to or somewhat
above the pace that was registered during the second half of last year.
We have seen some positive developments in the labor market.
Private payroll employment has increased by 165,000 jobs per month on
average since the middle of last year, and nearly 260,000 new
private-sector jobs were added in January. The job gains in recent
months have been relatively widespread across industries. In the public
sector, by contrast, layoffs by state and local governments have
continued. The unemployment rate hovered around 9 percent for much of
last year but has moved down appreciably since September, reaching 8.3
percent in January. New claims for unemployment insurance benefits have
The decline in the unemployment rate over the past year has been
somewhat more rapid than might have been expected, given that the
economy appears to have been growing during that time frame at or below
its longer-term trend; continued improvement in the job market is likely
to require stronger growth in final demand and production.
Notwithstanding the better recent data, the job market remains far from
normal: The unemployment rate remains elevated, long-term
unemployment is still near record levels, and the number of persons
working part time for economic reasons is very high.
Household spending advanced moderately in the second half of last
year, boosted by a fourth-quarter surge in motor vehicle purchases that
was facilitated by an easing of constraints on supply related to the
earthquake in Japan. However, the fundamentals that support spending
continue to be weak: Real household income and wealth were flat in 2011,
and access to credit remained restricted for many potential borrowers.
Consumer sentiment, which dropped sharply last summer, has since
rebounded but remains relatively low.
In the housing sector, affordability has increased dramatically as
a result of the decline in house prices and historically low interest
rates on conventional mortgages. Unfortunately, many potential buyers
lack the down payment and credit history required to qualify for loans;
others are reluctant to buy a house now because of concerns about their
income, employment prospects, and the future path of home prices. On the
supply side of the market, about 30 percent of recent home sales have
consisted of foreclosed or distressed properties, and home vacancy rates
remain high, putting downward pressure on house prices. More-positive
signs include a pickup in construction in the multifamily sector and
recent increases in homebuilder sentiment.
Manufacturing production has increased 15 percent since the trough
of the recession and has posted solid gains since the middle of last
year, supported by the recovery in motor vehicle supply chains and
ongoing increases in business investment and exports. Real business
spending for equipment and software rose at an annual rate of about 12
percent over the second half of 2011, a bit faster than in the first
half of the year. But real export growth, while remaining solid, slowed
somewhat over the same period as foreign economic activity decelerated,
particularly in Europe.
The members of the Board and the presidents of the Federal Reserve
Banks recently projected that economic activity in 2012 will expand at
or somewhat above the pace registered in the second half of last year.
Specifically, their projections for growth in real GDP this year,
provided in conjunction with the January meeting of the Federal Open
Market Committee (FOMC), have a central tendency of 2.2 to 2.7 percent.
These forecasts were considerably lower than the projections they made
last June. A number of factors have played a role in this reassessment.
First, the annual revisions to the national income and product accounts
released last summer indicated that the recovery had been somewhat
slower than previously estimated. In addition, fiscal and financial
strains in Europe have weighed on financial conditions and global
economic growth, and problems in U.S. housing and mortgage markets have
continued to hold down not only construction and related industries, but
also household wealth and confidence. Looking beyond 2012, FOMC
participants expect that economic activity will pick up gradually as
these headwinds fade, supported by a continuation of the highly
accommodative stance for monetary policy.
With output growth in 2012 projected to remain close to its
longer-run trend, participants did not anticipate further substantial
declines in the unemployment rate over the course of this year. Looking
beyond this year, FOMC participants expect the unemployment rate to
continue to edge down only slowly toward levels consistent with the
Committee’s statutory mandate. In light of the somewhat different
signals received recently from the labor market than from indicators of
final demand and production, however, it will be especially important to
evaluate incoming information to assess the underlying pace of economic
-more- (part 1 of 2)
** Market News International Washington Bureau: 202-371-2121 **