In a speech this morning in Jackson Hole, Wyoming, Federal Reserve Chairman Ben S. Bernanke said that the economy is recovering and that the Fed would not take any immediate steps to boost short-term growth. Bernanke said he was “optimistic” about long-term prospects for growth and that “the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years.” But he acknowledged that the nation is hampered by “massive unemployment and an unsustainable federal debt” and†indicated that the Fed might consider a boost to the economy in September when the Fed’s policy-making board (the Federal Open Market Committee) meets.
Bernanke did say that the recovery was “modest” and had been “disappointing” so far and that the Federal Open Market Committee has “marked down its outlook” for economic growth in the next few quarters. Indeed, data from the Commerce Department indicates that the US economy grew less than estimated, expanding at an annualized rate of 1% between April and March, down from a first estimate of 1.3%.
The Dow Jones Industrial average fell 200 points†after Bernanke’s comments that the Fed would stay at the sidelines for now but then more than made up for the decline this afternoon.
Bernanke hinted that the US government does need to do more to stimulate growth. From his speech:
“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.
“To achieve economic and financial stability, US fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time.
“As I have emphasised on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.”
The Fed has already said earlier this month that it will keep US short-term interest rates at the current low level of between zero and 0.25% until the middle of 2013.†This announcement indicates its view that economic growth will not rise quickly enough in that period to increase wages and prices.
Bernanke gave his speech in a highly charged political climate, when Rick Perry and other Republican presidential candidates have sharply criticized the Fed’s policies and loudly voiced disapproval of new steps. Economist Paul Krugman has gone so far as to say Perry and others are pretty much “politically intimidating” the Fed into inaction and a state of “externally induced paralysis”:
Political opposition has already crippled fiscal policy; instead of helping to create jobs, the federal government is pulling back, acting as a drag on output and employment.
The Fed has lengthened the September meeting of the†Federal Open Market Committee so it’s possible that a third round of the strategy of†quantitative easing might be announced then. But is the Fed willing to stick out its neck to do so?
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