–Key Question is Will Growth Lead to Continued, Material Job Gains
WASHINGTON (MNI) – Federal Reserve Chair Ben Bernanke said Thursday
policymakers have not yet decided if further monetary stimulus is needed
to support what appears to be a stuttering U.S. economic recovery, not
have they settled on what form any potential support would take.
Members of the Fed’s policymaking Federal Open Market Committee
must now ponder whether economic activity will expand at a sufficient
enough pace in the future to achieve a continued and “material progress”
on the jobs front, Bernanke said at a hearing before the Joint Economic
Committee.
Bernanke stressed that Fed officials have not yet reached the
conclusion that additional monetary accommodation is required or what
measures will be implemented.
“We have made no decisions,” he said. “I wouldn’t want to take
anything off the table at this juncture.
“If we decide that further action is required, then of course we
also have to decide what action is appropriate or what communication is
appropriate,” Bernanke said.
The Fed does have options it can consider, but Bernanke cautioned
that it will also have to make some “difficult assessments” regarding
the effectiveness of each option, “and whether there are costs and risks
associated with those steps that would outweigh the benefits they might
achieve.”
Asked about potential risks associated with another round of
quantitative easing, Bernanke said given the Fed’s limited experience
with that approach, “our understanding of its efficacy, and exactly how
much is needed, are less than the traditional monetary policy.”
But before the FOMC decides more monetary stimulus is needed and
what form it should take, “the main question we have to address has to
do with the likely strength of the economy going forward,” he said.
In his prepared testimony, Bernanke said the slowdown in employment
seen in recent months may be because 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 later told lawmakers that if this analysis is correct then, in
order to see continued improvement in employment and a lower jobless
rate going forward, “we’ll need to see growth at or above the trend rate
of growth (2% to 2.5%).”
That is the essential question monetary policymakers will have to
answer when the Federal Open Market Committee meets June 19-20, Bernanke
said: “Will there be enough growth going forward to make material
progress on the unemployment rate.”
The FOMC also will have to take the outlook for inflation into
account, he added.
With interest rates already so low, Bernanke was asked if he
believed further action by the Fed could achieve additional monetary
accommodation.
He said the fact rates are low will be a consideration in FOMC
deliberations, but, “I do think that we do have tools that would allow
us to get further accommodation in the economy and provide some
support.”
He stated his preference for a broad-based policy response to
tackling the nation’s economic struggles, with greater support from
fiscal policy.
“I would be much more comfortable if in fact Congress would take
some of this burden from us,” Bernanke said.
Bernanke also defended the Fed’s previous quantitative easing
programs, arguing they lowered interest rates, mortgage rates, and
raised stock prices, raising the wealth effects for consumers.
While the effects of recent programs have been less powerful,
compared to those implemented during the depths of the financial crisis,
Bernanke said “these sorts of measures could still add some additional
accommodation, some additional support to the economy.”
However, he acknowledged there may be “diminishing returns” from
future rounds of quantitative easing, something the Fed would have to
consider if it makes the decision to reach into its toolkit once again.
The Fed has had to resort to unorthodox measures to support the
recovery because it has already slashed interest rates close to zero,
and has said rates could remain at those levels at least through 2014.
Bernanke told the committee that while rates are expected to
normalize over time, the exact timing is very difficult to judge
“because it depends very much on the recovery of the economy.”
“While we see the economy moving in a moderate pace — in the right
direction — the point at which we are comfortable that it’s time to
withdraw monetary stimulus is obviously quite uncertain,” he said.
On the subject of the price stability, Bernanke said the Fed’s
explicit 2% target means the central bank does not want inflation above
or “well below” that mark.
But, “we think deflation, at this point, is a probably a pretty low
probability risk,” Bernanke said, adding that “at the moment inflation
seems to be pretty stable.”
Deflation is not the main concern, he said, rather it is “promoting
adequate growth to continue to bring down employment over time.”
Some believe significantly expanding the Fed’s balance sheet would
complicate the central bank’s eventual exit strategy and make inflation
more likely.
Bernanke sought to reassure lawmakers, however, telling them “we
are very confident that we can exit in a timely way from our balance
sheet strategy and there is in fact no justification for such a
concern.”
“We are very confident that we have the technical tools to bring
the balance sheet down to a more normal level … when we decide it is
time tighten monetary policy,” he said.
The Fed is “quite comfortable” with the technical aspects of its
exit strategy, Bernanke said, but the timing of the withdrawal will be
difficult. “It’s always possible that you could either undershoot or
overshoot, and that’s unavoidable.”
Bernanke singled out the still-depressed housing market as a drag
on the recovery, but noted that the sector “looks to be stabilizing,
which, if true, would be good news.”
He refused to be drawn into the debate on principal reduction of
mortgage loans for struggling homeowners, however, saying the Federal
Reserve Board has not taken an official position on the subject.
** MNI Washington Bureau: 202-371-2121 **
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