–Fed Remains Prepared To Act As Needed To Protect Fincl Sys, Economy
–Will Act To Protect Fincl System, Econ If Fincl Stresses ‘Escalate’
–May Need More Rapid Growth To Achieve Further Labor Mkt Improvement
–FOMC Ready To Adjust Portfolio ‘As Appropriate’ To Support Recovery

By Brai Odion-Esene

WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke Thursday
warned that the turmoil in Europe poses “significant risks,” to both the
U.S. financial system and the economy, with the crisis weighing on U.S.
businesses, consumers and pressuring the nation’s financial
institutions.

In testimony delivered to the Joint Economic Committee, Bernanke
assured lawmakers, however, that the Fed remains prepared to act “as
needed” to protect both the economy and the financial system, and the
central bank will step in should financial stresses “escalate.”

On the domestic front, Bernanke said the slowdown in employment
growth in recent month may indicate that “more-rapid” gains in economic
activity are needed to fuel further job expansion, reiterating that the
Fed’s policymaking Federal Open Market Committee stands ready to adjust
its portfolio “as appropriate” to aid the recovery.

Bernanke, however, made no explicit commitment to additional
monetary stimulus that some believe is needed on that the back of
disappointing economic data.

The issue that remains foremost on everyone’s minds is Europe, and
the Fed chief noted that worries about eurozone sovereign debt, as well
as the state of the monetary union’s banks, continue to create strains
in the global financial markets.

Apart from its direct impact on U.S. exports, Bernanke said the
crisis in Europe is “weighing on business and consumer confidence, and
pressuring U.S. financial markets and institutions.”

“The situation in Europe poses significant risks to the U.S.
financial system and economy and must be monitored closely,” he added.
“As always, the Federal Reserve remains prepared to take action as
needed to protect the U.S. financial system and economy in the event
that financial stresses escalate.”

Across the Atlantic, Bernanke said European authorities will likely
to need to take more actions to stabilize eurozone banks, calm market
fears about sovereign finances, achieve a workable fiscal framework for
the euro area, and lay the foundations for long-term economic growth.

There is also growing concern that the U.S. economic recovery may
be stuttering, or has stalled completely, especially in light of last
week’s May employment report that showed only 69,000 jobs added last
month.

Bernanke said economic growth has continued at a modest pace so far
in 2012, and appears poised to continue at that pace over coming
quarters — “supported in part by accommodative monetary policy.”

There has been an apparent slowing in the labor market, however,
which Bernanke said may have been exaggerated by issues related to
seasonal adjustment and the unusually warm weather this past winter.

“But it may also be the case that the larger gains seen late last
year and early this year were associated with some catch-up in hiring on
the part of employers who had pared their workforces aggressively during
and just after the recession,” he added.

“If so, the deceleration in employment in recent months may
indicate that this catch-up has largely been completed, and,
consequently, that more-rapid gains in economic activity will be
required to achieve significant further improvement in labor market
conditions,” Bernanke said.

The Fed chairman did tick off some positive signs he sees in the
economy, noting in particular that household spending increases have
been “relatively well sustained.”

In addition, “the recent declines in energy prices should provide
some offsetting lift to real purchasing power,” Bernanke said, adding
that consumer sentiment “is up noticeably” from its levels late in 2011.

Still, “households and businesses still appear quite cautious about
the economy,” Bernanke said, telling the congressional panel that
“concerns about developments in Europe, U.S. fiscal policy, and the
strength and sustainability of the recovery have left some firms
hesitant to expand capacity.”

The housing market also remains a drag on the recovery, Bernanke
continued, and he warned that a large supply of vacant houses continues
to limit incentives for new construction of new homes, and a substantial
backlog of foreclosures will likely add further that inventory of
unoccupied homes.

Opponents of additional monetary action by the Fed have raised the
threat of a future rise in inflation as a warning, but Bernanke appeared
comfortable with the Fed’s performance in keeping prices stable.

He said increases in the prices of oil or other commodities are
unlikely to result in persistent increases in overall inflation “so long
as household and business expectations of future price changes remain
stable,” adding that “longer-term inflation expectations have, indeed,
been quite well anchored.”

“Meanwhile, the substantial resource slack in U.S. labor and
product markets should continue to restrain inflationary pressures,” he
said, and went on to predict that — given these conditions — inflation
will remain at or slightly below the Fed’s now explicit 2% target.

Given an unemployment rate that is still quite high and the subdued
outlook for inflation — and the “significant downside risks” posed by
strains in global financial markets — Bernanke said the FOMC has
continued to maintain a highly accommodative stance of monetary policy.

“The Committee reviews the size and composition of its securities
holdings regularly and is prepared to adjust those holdings as
appropriate to promote a stronger economic recovery in a context of
price stability,” he said.

Bernanke also reserved portions of his testimony to renew calls for
Congress to correct the course of U.S. fiscal policy, which he said will
be a key influence on the economy’s medium and longer term performance.

The so-called “fiscal cliff,” he said, poses a significant threat
to the recovery.

And as for rapidly rising debt levels, they — at best — “will
lead to reduced rates of capital formation, slower economic growth, and
increased foreign indebtedness. At worst, they will provoke a fiscal
crisis that could have severe consequences for the economy,” Bernanke
warned.

** MNI Washington Bureau: 202-371-2121 **

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