By Steven K. Beckner
(MNI) – Federal Reserve Chairman Ben Bernanke renewed his concerns
about sluggish economic growth, high unemployment and tight credit
Monday, while giving assurances that inflation will stay “subdued” for
at least the next two years.
Bernanke said there is still “a considerable way to go to achieve a
full recovery” and said it will take “significant time” to return to
full employment.
The Fed chief did not talk about monetary policy.
Much of his speech to a group of state legislators echoed his July
Monetary Policy Report to Congress, but Bernanke added a new focus of
concern — the adverse impact of the recession on state and local
governments and, in turn, how their woes are feeding back into the
economy.
He maintained that state and local budget cuts are “part of the
reason for the sluggishness of the national recovery.”
“Our nation has endured a deep recession that in turn was triggered
by the most severe financial crisis since the Great Depression,” he said
in remarks prepared for delivery to the annual meeting of the Southern
Legislative Conference of the Council of State Governments in
Charleston, South Carolina.
“Today, the financial crisis appears to be mostly behind us, and
the economy seems to have stabilized and is expanding again,” he said.
“But we have a considerable way to go to achieve a full recovery in our
economy, and many Americans are still grappling with unemployment,
foreclosure, and lost savings.”
Bernanke gave no hint that he is concerned the economy may slip
back into a “double dip” recession, but rather expressed cautious
optimism that the recovery will continue, though not robustly.
“While the support to economic activity from stimulative fiscal
policies and firms’ restocking of their inventories will diminish over
time, rising demand from households and businesses should help sustain
growth,” he said.
“In particular, in the household sector, growth in real consumer
spending seems likely to pick up in coming quarters from its recent
modest pace, supported by gains in income and improving credit
conditions,” he continued.
Bernanke said business investment in equipment and software “has
been increasing rapidly, in part as a result of the deferral of capital
outlays during the downturn and the need of many businesses to replace
aging equipment.” And he added that “rising U.S. exports, reflecting the
expansion of the global economy and the recovery of world trade, have
helped foster growth in the U.S. manufacturing sector.”
But he then became less cheerful.
“To be sure, notable restraints on the recovery persist,” he said.
“The housing market has remained weak, with the overhang of vacant or
foreclosed houses weighing on home prices and new construction.”
“Similarly, poor economic fundamentals and tight credit are holding
back investment in nonresidential structures, such as office buildings,
hotels, and shopping malls,” he added.
Bernanke also observed that “the slow recovery in the labor market
and the attendant uncertainty about job prospects are weighing on
household confidence and spending.” Although private payrolls expanded
at an average of about 100,000 per month during the first half of this
year, Bernanke called that “a pace insufficient to reduce the
unemployment rate materially.”
“In all likelihood, significant time will be required to restore
the nearly 8-1/2 million jobs that were lost over 2008 and 2009,” he
said. “Moreover, nearly half of the unemployed have been out of work for
longer than six months.”
As for financial conditions, Bernanke said they are “much improved
since the depth of the financial crisis” but “have become somewhat less
supportive of economic growth in recent months” due to the debt crises
of Greece and other European nations.
On a more hopeful note, he said the euro-area assistance package
for indebted member nations and the recent stress test results for
European banks “appear to have reduced concerns in financial markets
about European prospects.”
But there are still financial problems on the home front, Bernanke
went on to say. While U.S. banking conditions have “improved
significantly since the worst of the crisis,” he said “many banks
continue to have a large volume of troubled loans, and bank lending
standards remain tight.”
“With credit demand weak and with banks writing down problem
credits, bank loans outstanding have continued to decline,” he said,
adding that small businesses “have been particularly hard hit by
restrictive lending standards.”
As he has said many times before, Bernanke said the Fed and other
regulators are working to ensure that “creditworthy borrowers” are not
denied credit.
In this dreary economic and financial climate, Bernanke made clear
he is not worried that the Fed’s aggressively accommodative monetary
policies will generate inflation.
“Inflation has been low, with consumer prices rising at an average
annual rate of about 1% in the first half of this year, and we
anticipate it will remain subdued over the next couple of years,” he
said. “Slack in labor and product markets has damped wage and price
pressures, and rapid productivity increases have helped firms control
their production costs.”
Bernanke did not directly address the issue of potential deflation,
but suggested that is not a real threat either by noting “measures of
expected inflation generally have remained stable.”
Much of the rest of the Fed Chairman’s speech was devoted to the
fiscal problems of state and local governments which he said have both
been aggravated by economic weakness and contribute to it.
Pointing to cutbacks in government programs and payrolls in the
face of declining revenues, he said, “Cuts in state and local programs
and employment are also weighing on economic activity.”
“With economic conditions still far from normal, state budgets will
probably remain under substantial pressure for a while, leaving
governors and legislatures a difficult juggling act as they try to
maintain essential services while meeting their budgetary obligations,”
he added.
Looking toward the future, Bernanke suggested that states prepare
for hard times by building up greater reserves or “rainy day funds.” And
he suggested that bond issues to finance infrastructure projects can be
helpful economic growth when times are bad.
** Market News International **
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