WASHINGTON (MNI) – The following is the complete text of the
remarks of Federal Reserve Chairman Ben Bernanke prepared Tuesday for
the Senate Banking Committee:
Chairman Johnson, Ranking Member Shelby, and other members of the
Committee, I am pleased to present the Federal Reserves semiannual
Monetary Policy Report to the Congress. I will begin with a discussion
of current economic conditions and the outlook before turning to
monetary policy.
The Economic Outlook
The U.S. economy has continued to recover, but economic activity
appears to have decelerated somewhat during the first half of this year.
After rising at an annual rate of 2-1/2 percent in the second half of
2011, real gross domestic product (GDP) increased at a 2 percent pace in
the first quarter of 2012, and available indicators point to a
still-smaller gain in the second quarter.
Conditions in the labor market improved during the latter part of
2011 and early this year, with the unemployment rate falling about a
percentage point over that period. However, after running at nearly
200,000 per month during the fourth and first quarters, the average
increase in payroll employment shrank to 75,000 per month during the
second quarter. Issues related to seasonal adjustment and the unusually
warm weather this past winter can account for a part, but only a part,
of this loss of momentum in job creation. At the same time, the jobless
rate has recently leveled out at just over 8 percent.
Household spending has continued to advance, but recent data
indicate a somewhat slower rate of growth in the second quarter.
Although declines in energy prices are now providing some support to
consumers purchasing power, households remain concerned about their
employment and income prospects and their overall level of confidence
remains relatively low.
We have seen modest signs of improvement in housing. In part
because of historically low mortgage rates, both new and existing home
sales have been gradually trending upward since last summer, and some
measures of house prices have turned up in recent months. Construction
has increased, especially in the multifamily sector. Still, a number of
factors continue to impede progress in the housing market. On the demand
side, many would-be buyers are deterred by worries about their own
finances or about the economy more generally. Other prospective
homebuyers cannot obtain mortgages due to tight lending standards,
impaired creditworthiness, or because their current mortgages are
underwater–that is, they owe more than their homes are worth. On the
supply side, the large number of vacant homes, boosted by the ongoing
inflow of foreclosed properties, continues to divert demand from new
construction.
After posting strong gains over the second half of 2011 and into
the first quarter of 2012, manufacturing production has slowed in recent
months. Similarly, the rise in real business spending on equipment and
software appears to have decelerated from the double-digit pace seen
over the second half of 2011 to a more moderate rate of growth over the
first part of this year. Forward-looking indicators of investment
demand–such as surveys of business conditions and capital spending
plans–suggest further weakness ahead. In part, slowing growth in
production and capital investment appears to reflect economic stresses
in Europe, which, together with some cooling in the economies of other
trading partners, is restraining the demand for U.S. exports.
At the time of the June meeting of the Federal Open Market
Committee (FOMC), my colleagues and I projected that, under the
assumption of appropriate monetary policy, economic growth will likely
continue at a moderate pace over coming quarters and then pick up very
gradually. Specifically, our projections for growth in real GDP prepared
for the meeting had a central tendency of 1.9 to 2.4 percent for this
year and 2.2 to 2.8 percent for 2013.1 These forecasts are lower than
those we made in January, reflecting the generally disappointing tone of
the recent incoming data.2 In addition, financial strains associated
with the crisis in Europe have increased since earlier in the year,
which–as I already noted–are weighing on both global and domestic
economic activity. The recovery in the United States continues to be
held back by a number of other headwinds, including still-tight
borrowing conditions for some businesses and households, and — as I
will discuss in more detail shortly — the restraining effects of fiscal
policy and fiscal uncertainty. Moreover, although the housing market has
shown improvement, the contribution of this sector to the recovery is
less than has been typical of previous recoveries. These headwinds
should fade over time, allowing the economy to grow somewhat more
rapidly and the unemployment rate to decline toward a more normal level.
However, given that growth is projected to be not much above the rate
needed to absorb new entrants to the labor force, the reduction in the
unemployment rate seems likely to be frustratingly slow. Indeed, the
central tendency of participants forecasts now has the unemployment
rate at 7 percent or higher at the end of 2014.
The Committee made comparatively small changes in June to its
projections for inflation. Over the first three months of 2012, the
price index for personal consumption expenditures (PCE) rose about 3-1/2
percent at an annual rate, boosted by a large increase in retail energy
prices that in turn reflected the higher cost of crude oil. However, the
sharp drop in crude oil prices in the past few months has brought
inflation down. In all, the PCE price index rose at an annual rate of
1-1/2 percent over the first five months of this year, compared with a
2-1/2 percent rise over 2011 as a whole. The central tendency of the
Committees projections is that inflation will be 1.2 to 1.7 percent
this year, and at or below the 2 percent level that the Committee judges
to be consistent with its statutory mandate in 2013 and 2014.
(1 See table 1, “Economic Projections of Federal Reserve Board
Members and Federal Reserve Bank Presidents, June 2012,” of the Summary
of Economic Projections, available at the Board of Governors of the
Federal Reserve System (2012), “Federal Reserve Board and Federal Open
Market Committee Release Economic Projections from the June 19-20 FOMC
Meeting,” press release, June 20,
www.federalreserve.gov/newsevents/press/monetary/20120620b.htm; table 1
is also available in Part 4 of the July Monetary Policy Report to the
Congress.)
(2 Ben S. Bernanke (2012), “Semiannual Monetary Policy Report to
the Congress,” statement before the Committee on Financial Services,
U.S. House of Representatives, February 29,
www.federalreserve.gov/newsevents/testimony/bernanke20120229a.htm.)
Risks to the Outlook
Participants at the June FOMC meeting indicated that they see a
higher degree of uncertainty about their forecasts than normal and that
the risks to economic growth have increased. I would like to highlight
two main sources of risk: The first is the euro-area fiscal and banking
crisis; the second is the U.S. fiscal situation.
Earlier this year, financial strains in the euro area moderated in
response to a number of constructive steps by the European authorities,
including the provision of three-year bank financing by the European
Central Bank. However, tensions in euro-area financial markets
intensified again more recently, reflecting political uncertainties in
Greece and news of losses at Spanish banks, which in turn raised
questions about Spains fiscal position and the resilience of the
euro-area banking system more broadly. Euro-area authorities have
responded by announcing a number of measures, including funding for the
recapitalization of Spains troubled banks, greater flexibility in the
use of the European financial backstops (including, potentially, the
flexibility to recapitalize banks directly rather than through loans to
sovereigns), and movement toward unified supervision of euro-area banks.
Even with these announcements, however, Europes financial markets and
economy remain under significant stress, with spillover effects on
financial and economic conditions in the rest of the world, including
the United States.
Moreover, the possibility that the situation in Europe will worsen
further remains a significant risk to the outlook.
The Federal Reserve remains in close communication with our
European counterparts. Although the politics are complex, we believe
that the European authorities have both strong incentives and sufficient
resources to resolve the crisis. At the same time, we have been focusing
on improving the resilience of our financial system to severe shocks,
including those that might emanate from Europe. The capital and
liquidity positions of U.S. banking institutions have improved
substantially in recent years, and we have been working with U.S.
financial firms to ensure they are taking steps to manage the risks
associated with their exposures to Europe. That said, European
developments that resulted in a significant disruption in global
financial markets would inevitably pose significant challenges for our
financial system and our economy.
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** MNI Washington Bureau: 202-371-2121 **
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