By Steven K. Beckner

WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke gave no
hint of new monetary stimulus measures, but said that the Fed’s
currently “highly accommodative” monetary stance is “consistent” with
both its price stability and maximum employment objectives.

Bernanke, delivering the Fed’s semi-annual Monetary Policy Report
to Congress, said that the recent upsurge in gasoline prices will tend
to increase inflation “temporarily” while also tending to undermine
already soft consumer spending and in turn economic growth.

He seemed to resolve those conflicting concerns in favor of growth
by emphasizing the temporary nature of gasoline’s inflation impact and
saying that inflation expectations suggest that inflation will remain
“subdued” in testimony prepared for delivery to the House Financial
Services Committee.

Bernanke acknowledged improvements in labor market conditions in
recent months but suggested a good degree of skepticism, suggesting that
the gains in non-farm payrolls and reductions in the unemployment rate
are not consistent with the modest pace of GDP growth. To get further
improvements in the job market, he said the economy will likely have to
grow faster.

Bernanke said the Fed would take a “balanced” approach if either
unemployment or inflation were to “deviate” from the Fed’s objectives,
implying that a temporary rise in inflation probably would not lead the
Fed to lessen the degree of monetary accommodation so long as
unemployment remains high.

The Fed chief was moderately upbeat about the situation in Europe
in wake of the weekend’s Group of 20 meeting and the inking of a new
rescue package for Greece, but like Treasury Secretary Timothy Geithner
suggested that much more needs to be done.

In his Jan. 25 press conference, which followed a meeting of the
Fed’s policymaking Federal Open Market Committee, Bernanke said the FOMC
“is prepared to provide further monetary accommodation if employment is
not making sufficient progress towards assessment of maximum level or
inflation shows signs of moving below the mandated consistent rate.”

There was no such statement of preparedness to ease further in
Wednesday’s congressional testimony, which he was delivering on behalf
of the FOMC.

Instead, after reviewing stimulative actions already taken,
Bernanke contented himself with saying “the Committee judges that
sustaining a highly accommodative stance for monetary policy is
consistent with promoting both objectives.”

“However, in cases where these objectives are not complementary,
the Committee follows a balanced approach in promoting them, taking into
account the magnitudes of the deviations of inflation and employment
from levels judged to be consistent with the dual mandate, as well as
the potentially different time horizons over which employment and
inflation are projected to return to such levels,” he added

At the same time, nothing in Bernanke’s testimony was at odds with
the possibility of a third round of quantitative easing.

For one thing, he continued to sound relatively glum about the
economy — the labor market in particular.

True, there have been “some positive developments in the labor
market,” he said, pointing to average private payroll gains of 165,000
jobs per month since the middle of last year, the dip in unemployment to
8.3% and the recent downtrend in new claims for unemployment insurance
benefits.

However, Bernanke suggested these data must be interpreted very
cautiously, if not skeptically.

“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,” he said, adding, “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,” Bernanke said.

The Fed chairman went on to observe that “the fundamentals that
support spending continue to be weak” and pointed to ongoing problems on
both the supply and demand side of the housing market. He was more
upbeat about manufacturing.

Bernanke noted that FOMC participants, in their January forecasting
exercise, revised down their expectations for GDP growth and look for
the economy to grow no more than it did in the second half of last year
— about 2 1/4%.

“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 recovery,” he
said.

Meanwhile, inflation seemed to be the least of Bernanke’s
concerns. He recalled that the inflation upsurge caused by commmodity
price increases last spring had proven transitory as he predicted. And
he said a similar pattern is likely to unfold this Spring.

Since the FOMC met and anticipated “subdued” inflation, he observed
that gasoline prices have risen due to soaring oil prices. But he called
this ” development that is likely to push up inflation temporarily while
reducing consumers’ purchasing power.”

“We will continue to monitor energy markets carefully,” he
continued, but he observed, “Longer-term inflation expectations, as
measured by surveys and financial market indicators, appear consistent
with the view that inflation will remain subdued.”

Bernanke defended the Fed’s new 2% inflation target in the context
of an overall push to increase “transparency.”

Anticipating potential objections to the Fed’s policy of targeting
inflation but not unemployment, he said, “While maximum employment
stands on an equal footing with price stability as an objective of
monetary policy, the maximum level of employment in an economy is
largely determined by nonmonetary factors that affect the structure and
dynamics of the labor market; it is therefore not feasible for any
central bank to specify a fixed goal for the longer-run level of
employment.”

“However, the Committee can estimate the level of maximum
employment and use that estimate to inform policy decisions,” he went
on, noting that in January the FOMC participants estimated a
longer-run, normal rate of unemployment in the range of 5.2% to 6.0%.

Bernanke stressed that “the level of maximum employment in an
economy is subject to change; for instance, it can be affected by shifts
in the structure of the economy and by a range of economic policies. If
at some stage the Committee estimated that the maximum level of
employment had increased, for example, we would adjust monetary policy
accordingly.”

Europe has been one of the “headwinds” facing Fed policymakers for
more than a year, and Bernanke gave an even-handed assessment of the
current risks from that direction.

“A number of constructive policy actions have been taken of late in
Europe, including the European Central Bank’s program to extend
three-year collateralized loans to European financial institutions,” he
said. “Most recently, European policymakers agreed on a new package of
measures for Greece, which combines additional official-sector loans
with a sizable reduction of Greek debt held by the private sector.”

“However, critical fiscal and financial challenges remain for the
euro zone, the resolution of which will require concerted action on the
part of European authorities,” he continued. “Further steps will also be
required to boost growth and competitiveness in a number of countries.”

Bernanke added that “we are in frequent contact with our
counterparts in Europe and will continue to follow the situation
closely.”

** Market News International Washington Bureau: 202-371-2121 **

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