Bernanke hints of more aggressive Fed action
JACKSON HOLE, WYO.
August 31, 2012
• Says something must be done about unemployment
• ‘The Federal Reserve will provide additional policy accommodation as needed’
Federal Reserve Chairman Ben Bernanke on Friday hinted at a more aggressive Fed stance when it comes to stimulating the moribund national economy.
But he did not say just what the Fed might do in remarks made at the Federal Reserve Bank of Kansas City Economic Symposium being held at Jackson Hole, Wyo.
“The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” he says.
Mr. Bernanke says the Great Recession and ongoing strains on the financial markets make the challenges facing monetary policymakers all the greater.
He says some progress has been made with the nation’s overall unemployment rate falling to 8.3 percent in July from its peak of 10 percent at the depths of the Great Recession.
Key sectors such as manufacturing, housing, and international trade have strengthened, investment in equipment and software has rebounded, and conditions in financial and credit markets have improved, he says.
“Notwithstanding these positive signs, the economic situation is obviously far from satisfactory. The unemployment rate remains more than 2 percentage points above … its longer-run normal value, and other indicators -- such as the labor force participation rate and the number of people working part time for economic reasons -- confirm that labor force utilization remains at very low levels,” he says. “Further, the rate of improvement in the labor market has been painfully slow.”
The Fed chief, a recognized expert on the causes of the Great Depression of the 1930s, says he sees three major problems that need to be solved for the economy to return to prosperity.
In his words:
“I see growth being held back currently by a number of headwinds. First, although the housing sector has shown signs of improvement, housing activity remains at low levels and is contributing much less to the recovery than would normally be expected at this stage of the cycle.
“Second, fiscal policy, at both the federal and state and local levels, has become an important headwind for the pace of economic growth. Notwithstanding some recent improvement in tax revenues, state and local governments still face tight budget situations and continue to cut real spending and employment. Real purchases are also declining at the federal level. Uncertainties about fiscal policy, notably about the resolution of the so-called fiscal cliff and the lifting of the debt ceiling, are probably also restraining activity, although the magnitudes of these effects are hard to judge.30 It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs. However, policymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery.
“Third, stresses in credit and financial markets continue to restrain the economy. Earlier in the recovery, limited credit availability was an important factor holding back growth, and tight borrowing conditions for some potential homebuyers and small businesses remain a problem today. More recently, however, a major source of financial strains has been uncertainty about developments in Europe.”
As to what the Federal Reserve might be able to do to put the economy back on track, Mr. Bernanke indicated it might be limited.
“Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes,” he says.