WASHINGTON (MNI) – The following is the text of Federal Reserve
Chairman Ben Bernanke’s testimony prepared Thursday for the House Budget
Committee:
Chairman Ryan, Vice Chairman Garrett, Ranking Member Van Hollen,
and other members of the Committee, I appreciate this opportunity to
discuss my views on the economic outlook, monetary policy, and the
challenges facing federal fiscal policymakers.
The Economic Outlook
Over the past two and a half years, the U.S. economy has been
gradually recovering from the recent deep recession. While conditions
have certainly improved over this period, the pace of the recovery has
been frustratingly slow, particularly from the perspective of the
millions of workers who remain unemployed or underemployed. Moreover,
the sluggish expansion has left the economy vulnerable to shocks.
Indeed, last year, supply chain disruptions stemming from the earthquake
in Japan, a surge in the prices of oil and other commodities, and
spillovers from the European debt crisis risked derailing the recovery.
Fortunately, over the past few months, indicators of spending,
production, and job market activity have shown some signs of
improvement; and, in economic projections just released, Federal Open
Market Committee (FOMC) participants indicated that they expect somewhat
stronger growth this year than in 2011. The outlook remains uncertain,
however, and close monitoring of economic developments will remain
necessary.
As is often the case, the ability and willingness of households to
spend will be an important determinant of the pace at which the economy
expands in coming quarters. Although real consumer spending rose
moderately last quarter, households continue to face significant
headwinds. Notably, real household income and wealth stagnated in 2011,
and access to credit remained tight for many potential borrowers.
Consumer sentiment has improved from the summer’s depressed levels but
remains at levels that are still quite low by historical standards.
Household spending will depend heavily on developments in the labor
market. Overall, the jobs situation does appear to have improved
modestly over the past year: Private payroll employment increased by
about 160,000 jobs per month in 2011, the unemployment rate fell by
about 1 percentage point, and new claims for unemployment insurance
declined somewhat. Nevertheless, as shown by indicators like the rate of
unemployment and the ratio of employment to population, we still have a
long way to go before the labor market can be said to be operating
normally. Particularly troubling is the unusually high level of
long-term unemployment: More than 40 percent of the unemployed have been
jobless for more than six months, roughly double the fraction during the
economic expansion of the previous decade.
Uncertain job prospects, along with tight mortgage credit
conditions, continue to hold back the demand for housing. Although low
interest rates on conventional mortgages and the drop in home prices in
recent years have greatly improved the affordability of housing, both
residential sales and construction remain depressed. A persistent excess
supply of vacant homes, largely stemming from foreclosures, is keeping
downward pressure on prices and limiting the demand for new
construction.
In contrast to the household sector, the business sector has been a
relative bright spot in the current recovery. Manufacturing production
has increased 15 percent since its trough, and capital spending by
businesses has expanded briskly over the past two years, driven in part
by the need to replace aging equipment and software. Moreover, many U.S.
firms, notably in manufacturing but also in services, have benefited
from strong demand from foreign markets over the past few years.
More recently, the pace of growth in business investment has
slowed, likely reflecting concerns about both the domestic outlook and
developments in Europe. However, there are signs that these concerns are
abating somewhat. If business confidence continues to improve, U.S.
firms should be well positioned to increase both capital spending and
hiring: Larger businesses are still able to obtain credit at
historically low interest rates, and corporate balance sheets are
strong. And, though many smaller businesses continue to face
difficulties in obtaining credit, surveys indicate that credit
conditions have begun to improve modestly for those firms as well.
Globally, economic activity appears to be slowing, restrained in
part by spillovers from fiscal and financial developments in Europe. The
combination of high debt levels and weak growth prospects in a number of
European countries has raised significant concerns about their fiscal
situations, leading to substantial increases in sovereign borrowing
costs, concerns about the health of European banks, and associated
reductions in confidence and the availability of credit in the euro
area. Resolving these problems will require concerted action on the part
of European authorities. They are working hard to address their fiscal
and financial challenges. Nonetheless, risks remain that developments in
Europe or elsewhere may unfold unfavorably and could worsen economic
prospects here at home. We are in frequent contact with European
authorities, and we will continue to monitor the situation closely and
take every available step to protect the U.S. financial system and the
economy.
Let me now turn to a discussion of inflation. As we had
anticipated, overall consumer price inflation moderated considerably
over the course of 2011. In the first half of the year, a surge in the
prices of gasoline and food–along with some pass-through of these
higher prices to other goods and services — had pushed consumer
inflation higher. Around the same time, supply disruptions associated
with the disaster in Japan put upward pressure on motor vehicle prices.
As expected, however, the impetus from these influences faded in the
second half of the year, leading inflation to decline from an annual
rate of about 3-1/2 percent in the first half of 2011 to about 1-1/2
percent in the second half — close to its average pace in the preceding
two years. In an environment of well-anchored inflation expectations,
more-stable commodity prices, and substantial slack in labor and product
markets, we expect inflation to remain subdued. Against that backdrop,
the Federal Open Market Committee (FOMC) decided last week to maintain
its highly accommodative stance of monetary policy. In particular, the
Committee decided to continue its program to extend the average maturity
of its securities holdings, to maintain its existing policy of
reinvesting principal payments on its portfolio of securities, and to
keep the target range for the federal funds rate at 0 to 1/4 percent.
The Committee now anticipates that economic conditions are likely to
warrant exceptionally low levels of the federal funds rate at least
through late 2014.
As part of our ongoing effort to increase the transparency and
predictability of monetary policy, following its January meeting the
FOMC released a statement intended to provide greater clarity about the
Committee’s longer-term goals and policy strategy.1 The statement begins
by emphasizing the Federal Reserve’s firm commitment to pursue its
congressional mandate to foster stable prices and maximum employment. To
clarify how it seeks to achieve these objectives, the FOMC stated its
collective view that inflation at the rate of 2 percent, as measured by
the annual change in the price index for personal consumption
expenditures, is most consistent over the longer run with the Federal
Reserve’s statutory mandate; and it indicated that the central tendency
of FOMC participants’ current estimates of the longer-run normal rate of
unemployment is between 5.2 and 6.0 percent. The statement noted that
these statutory objectives are generally complementary, but when they
are not, the Committee will take a balanced approach in its efforts to
return both inflation and employment to their desired levels.
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** Market News International Washington Bureau: 202-371-2121 **
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