WASHINGTON (Reuters) – The Federal Reserve is prepared to take further steps to help an economic recovery that is “close to faltering”, Fed Chairman Ben Bernanke said on Tuesday.
Citing anemic employment, depressed confidence and financial risks from Europe, Bernanke urged lawmakers not to cut spending too quickly in the short term even as they grapple with trimming the long-run budget deficit.
He also made clear the Fed — the U.S. central bank — stands ready to ease monetary conditions further following its launch of a new stimulus measure in September.
“The (Fed’s policy-setting Open Market) Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability,” Bernanke told the Joint Economic Committee of Congress.
His language was the firmest indication yet that the Fed may take further steps to prevent a weakening U.S. economy from stumbling back into recession. Financial analysts over the past week increasingly have warned that economic contraction is a considerable and mounting risk.
The prospect of further Fed support for the economy provided support to U.S. stocks, which pared earlier losses sustained on the darkening outlook in Europe amid fears of a Greek default.
Bernanke said government belt-tightening was likely to prove a significant drag on the world’s largest economy, which averaged less than 1 percent annualized growth in the first half of the year.
“An important objective is to avoid fiscal actions that could impede the ongoing economic recovery,” he said,
Bernanke said Europe’s debt crisis poses ‘ongoing risks’ to U.S. economic growth, saying they had already dampened the mood of households and businesses.
Stressing that higher inflation earlier in the year had not become ingrained in the economy, Bernanke argued price pressures will remain subdued for the foreseeable future.
That backdrop made it easier for the Fed to launch a fresh monetary easing effort in September, when it announced it would be selling $400 billion in short-term Treasuries and use the proceeds to buy longer-dated ones.
Bernanke estimated the new policy would lower long-term interest rates by about 0.20 percentage point, which he said was roughly equivalent to a half percentage point reduction in the benchmark federal funds rate.
He said the action is significant but not a game changer.
“We think this is a meaningful but not an enormous support to the economy. I think it provides some additional monetary accommodation, it should help somewhat on job creation and growth. It’s particularly important now 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 the unemployment rate continues to fall downward.
A depressed housing sector and tight credit are other factors preventing a more robust expansion, Bernanke said, while offering little hope for improvement in employment.
“Recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead,” he told the Joint Economic Committee of Congress.
The policy is expected to have a dampening effect on long-term rates, stimulating lending and investment. However, many economists doubts its effectiveness, arguing that the key underlying problem is low demand rather than a lack of credit.
In response to the financial crisis and recession of 2008-2009, the Fed slashed interest rates to effectively zero and more than tripled the size of its balance sheet to a record $2.9 trillion.
(Editing by James Dalgleish)