US Federal Reserve Chairman Ben Bernanke said the US economic recovery “is close to faltering” and the central bank is prepared to take further steps to support it.
The central bank chief spoke on a day when the stock market spent most of the trading hours in bear-market territory — down 20 percent from its most recent highs in April. A late-day rally helped the market finish higher.
Bernanke’s exchange with US lawmakers seemed to capture the growing belief that no one is prepared to help the global economy in any meaningful way anytime soon. Speaking in unusually frank terms, he also captured the US’ sour economic mood.
Photo: Reuters
The Fed chief was asked about protests around Wall Street, which went on for an 18th day, as demonstrators railed against corporate greed and expressed frustration over the economy.
Bernanke replied: “I think people are quite unhappy with the state of the economy and what’s happening. They blame, with some justification, the problems in the financial sector for getting us into this mess. And they’re dissatisfied with the policy response here in Washington. And at some level, I can’t blame them.”
“Certainly, 9 percent unemployment and very slow growth is not a very good situation,” he added. “That’s why they are protesting.”
Throughout the day, traders and US policymakers kept one eye on Europe, where a debt crisis has dragged on more than a year. Investors worry a messy default by Greece could hurt European banks and their US counterparts.
On Tuesday, the Greek finance minister said the nation has enough money to pay pensions, salaries and bondholders through the middle of next month — and that was seen as good news. Bernanke told the US Congress there was little the Fed could do about Europe’s problems.
“Unfortunately, we are innocent bystanders here,” he said. “I am persuaded they are aware of the risks.”
Bernanke said he believes the Fed’s latest move to help the economy would be “meaningful, but not an enormous support” for the economy. The program, known as Operation Twist, is designed to lower long-term interest rates so people and businesses will spend more money.
“It should help, somewhat, on job creation and growth,” the Fed chief told Congress. “It’s particularly important now that the economy is close, the recovery is close to faltering.”
“We need to make sure that the recovery continues and doesn’t drop back and that the unemployment rate continues to fall,” he added.
The Fed has used most of its tools to help the economy. It said this summer it expects to keep interest rates super-low into 2013.
Even if a global recession can be avoided, the US economy faces a bleak outlook. Some economists fear that Congress could worsen things by cutting spending over the next several years. At the same time, Congress might let a Social Security tax cut expire at year’s end. Income tax cuts could expire next year.
Andrew Tilton, an economist with Goldman Sachs, forecasts overall economic growth of just 1.7 percent this year, followed by a scant 0.5 percent annual rate in the first three months of next year. For all of next year, he projects 1.4 percent growth. Economists at Bank of America Merrill Lynch expect growth below 2 percent this year, next year and in 2013.
In his testimony, Bernanke said the Fed is prepared to support the US economy, but he made clear the Fed’s efforts to force down long-term interest rates were no “panacea for the problems currently faced by the US economy.”
“Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector,” Bernanke said.
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