US Federal Reserve Chairman Ben Bernanke on Tuesday said the outlook for the long-suffering US economy was improving, but supportive policies would be needed for some time to prevent rising unemployment from undercutting recovery.
Delivering the Fed’s semiannual report on the economy to Congress, Bernanke also sought to dispel concerns the US central bank’s aggressive monetary easing could end up fueling inflation, saying he was confident the Fed could pull back its extraordinary stimulus when the time was right.
“Better conditions in financial markets have been accompanied by some improvement in economic prospects,” Bernanke told the House of Representatives Financial Services Committee. “Despite these positive signs, the rate of job loss remains high.”
While housing and household spending appear to be stabilizing, unemployment is likely to remain uncomfortably high into 2011 and could sap fragile consumer confidence, he said.
“The [Fed] believes that a highly accommodative stance of monetary policy will be appropriate for an extended period,” Bernanke said.
The Fed and other central banks have cut benchmark interest rates to record low levels and introduced unconventional measures to encourage growth.
Meanwhile, Bank of Japan Deputy Governor Hirohide Yamaguchi said yesterday the central bank will end its unprecedented credit programs in a way that is least disruptive to investors.
“The bank will, without any predetermined view, carefully assess developments in corporate financing and financial markets,” Yamaguchi said in a speech in Hakodate, northern Japan. “It is important to plan an exit in a way that market participants can anticipate and not bring about unnecessary market disturbances.”
Yamaguchi said prolonging the programs may hurt the central bank’s balance sheet and such “excessive” intervention could create large swings in the economy and prices.
Yamaguchi said the central bank needs to pay attention to the risk that the economy may not improve as much as it forecast. The sustainability of Japan’s recovery depends on the strength of capital spending and consumption, which are heavily reliant on overseas demand, and these “downside” risks “warrant particular attention,” he said.
“If the recovery in overseas economies is delayed or overseas economic conditions deteriorate unexpectedly, firms may become more cautious about the future economic outlook” and cut investment and wages, further weakening consumption, Yamaguchi said.
Yamaguchi reiterated that the economy will start recovering in the second half of this fiscal year and that deflation won’t take hold even though prices are falling.
“We must pay close attention to the risk that price declines and the recession will worsen in a spiraling manner,” Yamaguchi told reporters after the speech. “We consider this risk low and therefore don’t need further policy easing now.”
Consumer prices excluding fresh food, the central bank’s preferred gauge of inflation, fell 1.1 percent in May from a year earlier, the sharpest decrease since comparable figures were first compiled in 1971. Yamaguchi said that the decline in consumer prices will start to ease later this year.
It’s “unlikely at present that prices will continue to decline and thereby lead Japan’s economy into a deflationary spiral,” Yamaguchi said.