Sat, Jun 09, 2012 - Page 10 News List

Fed to act if European crisis deepens

CLOSE WATCH:The US Federal Reserve boss said Europe was not his only concern, warning that tighter US fiscal policies next year could hurt the US economy more

Reuters, Washington

US Federal Reserve Chairman Ben Bernanke testifies at a Joint Economic Committee hearing on economic outlook and policy on Capitol Hill in Washington on Thursday.

Photo: Reuters

US Federal Reserve Chairman Ben Bernanke said on Thursday the US central bank was ready to shield the economy if financial troubles mount, but offered few hints that further monetary stimulus was imminent.

He told Congress the Fed was closely monitoring “significant risks” to the US recovery from Europe’s debt crisis, but struck a decidedly different tone from the central bank’s No. 2 official, who argued in favor of monetary support on Wednesday.

For investors hungry for clues about the prospect for a third round of large-scale Fed bond buying, Bernanke’s testimony disappointed.

“The Federal Reserve remains prepared to take action as needed to protect the US economy in the event that financial stresses escalate,” he told the congressional Joint Economic Committee.

Stocks pared gains on Bernanke’s remarks, but remained positive after a steep rally on Wednesday, while the US dollar strengthened against the euro.

Slowing US job creation, evident in surprisingly weak employment data on Friday last week, and an escalation in the eurozone’s crisis had raised expectations of Fed action, perhaps as early as the central bank’s next policy meeting on June 19 and June 20.

Yet Bernanke’s tone was far from crisis mode.

Indeed, he sounded somewhat sanguine about the outlook.

“Economic growth appears poised to continue at a moderate pace over coming quarters,” he said. “Despite economic difficulties in Europe, the demand for US exports has held up well.”

Fed Vice Chair Janet Yellen made the case on Wednesday for acting before the economy worsened, either by outright bond purchases or other means, given “a number of significant downside risks” to growth.

Bernanke made no such suggestion, although Europe was not his only worry spot. He told legislators tighter US fiscal policies set to take effect early next year if Congress doesn’t act “would, if allowed to occur, pose a significant threat to the recovery.”

The government said on Friday last week that US employment growth slowed for a fourth straight month last month, with employers adding a paltry 69,000 workers to their payrolls.

Bernanke said the slowdown might have been exaggerated because unusually warm weather in the winter had pulled forward hiring. However, he also raised a more troubling prospect: that the economy was simply growing too slowly.

He said the main question Fed policymakers will face later this month is whether the economic recovery will move forward swiftly enough to keep the labor market on an improving path.

The debate at the Fed’s meeting will likely be heated, given the range of views officials have expressed this week about the desirability of a further easing of monetary policy.

Bernanke, who said he did not want to prejudge the outcome of the meeting, left economists split on whether and when the Fed might act.

“While a few Fed officials have been more supportive of further easing in recent days, overall Mr Bernanke indicated that the Fed is still in wait-and-see mode,” said Michael Hanson, senior economist at Bank of America Merrill Lynch.

The Fed has kept benchmark US interest rates near zero since late 2008 and has expanded its balance sheet sharply to nearly US trillion to keep long-term borrowing costs down.

Its most recent stimulus program, known as Operation Twist, is set to expire at the end of this month The program involves selling shorter-dated Treasury securities and buying longer-term ones in an effort to press long-term rates lower. Short of expanding its balance sheet through outright bond purchases, the Fed could extend Operation Twist.

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