US Federal Reserve Chairman Ben Bernanke on Tuesday offered a gloomy view of the economy’s prospects, but provided few concrete clues on whether the US central bank was moving closer to a fresh round of monetary stimulus.
Bernanke told the Senate Banking Committee the economic recovery was being held back by anxiety over Europe’s debt crisis and the path of US fiscal policy, and he expressed unease over a stagnant jobs market.
The Fed chairman told lawmakers the central bank was considering a range of tools it could employ to help the economy, but he hewed closely to the message of watchful waiting that the central bank’s policy panel delivered last month.
“Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to economic growth, the committee made clear at its June meeting that it is prepared to take further action,” Bernanke said in his testimony on the Fed’s semi-annual monetary policy report.
Some investors had hoped the Fed chief would signal that the central bank was moving close to a third round of bond purchases — or quantitative easing — to support the economy.
US stocks initially fell on disappointment on Tuesday, but clawed back to close up on the day on better-than-expected profit forecasts from Coca-Cola and Goldman Sachs.
Asian shares were on the back foot yesterday on Bernanke’s gloomy view of the US economy. European shares edged higher, but the euro eased, as investors reacted cautiously to Bernanke’s little guidance on any new stimulus.
The Fed has held overnight borrowing costs near zero since December 2008 and has bought US$2.3 trillion in government and mortgage-related debt to push long-term interest rates lower.
As the recovery faltered, it promised to hold rates at rock bottom levels until at least 2014 and, at its meeting last month, it extended a program to lengthen the average maturity of bonds in its portfolio to depress long-term borrowing costs.
The Fed next meets on July 31 to Aug. 1. Few economists expect it to take further steps to spur the recovery then, but many think fresh stimulus measures could come as early as the subsequent meeting in September.
At the hearing, lawmakers sought to lobby the Fed from both ends of the political spectrum.
Democratic Senator Chuck Schumer urged the Fed to ramp up its support for growth, while Republican Senator Bob Corker advised it to stay on the sidelines.
Bernanke said the risks of a surge in inflation were low and that there was a modest risk of a broad-based decline in prices.
Bernanke said Fed policymakers would consider a range of tools to further stimulate growth if it became clear the labor market was not improving or if deflation risks mounted.
He cited the possibility of additional bond buying — whether Treasury debt or mortgage-backed securities — lending through the Fed’s emergency loan window, and lowering the rate the Fed pays banks on reserves held at the central bank.
The Fed could also use communications tools, such as extending its pledge to hold rates exceptionally low, he added.