The unexpected weakness is forcing the Fed to reconsider its determination early this year to refrain from new efforts to stimulate growth. While no additional actions appear imminent, Mr. Bernanke said in Congressional testimony Wednesday that the Fed would be prepared to act if necessary.
He described options including an explicit commitment to maintain its stimulus efforts for a longer period, the resumption of asset purchases and steps that would encourage commercial banks to use the reserves they currently keep on deposit with the central bank.
“I think we have to keep all the options on the table,” Mr. Bernanke said before the House Financial Services Committee. “We don’t know where the economy is going to go.”
Members of the Fed’s policy-making committee discussed the possibility of additional efforts at their most recent meeting, at the end of June, but they were divided regarding the costs and benefits, according to minutes of that meeting, which the Fed released on Tuesday.
Mr. Bernanke made clear Wednesday that a resumption of the central bank’s economic revival campaign faces a high hurdle. He said that the Fed would look for two conditions: economic weakness beyond current expectations and a renewed threat of deflation.
The first seems obvious to most people. The second, however, may the more important factor. The Fed’s decision to resume asset purchases last summer was made in large part because the central bank feared that prices might begin to decline, a phenomenon that can undermine growth because it causes people to delay purchases, fueling a downward cycle.
The pace of price increases since then has rebounded toward levels that economists consider healthy. Indeed, earlier this year, concern shifted to the possibility that prices were rising too fast. The Fed’s most recent forecast, last month, projected little risk of deflation.
Mr. Bernanke maintained his view, however, that a recent rise in inflation is unlikely to persist, consistent with his view that “this is still not a very strong recovery.”
Since he last spoke, however, the government reported that employment increased by only 18,000 jobs in June and that exports were weaker than expected. That has led a number of private forecasters to slash estimates of second-quarter growth. And Mr. Bernanke’s remarks on Wednesday reflected greater concern about the health of the economy.
Among the headwinds facing the economy is “the slow growth of consumer spending, even after accounting for the effects of food and higher energy prices,” Mr. Bernanke said in his prepared testimony. “The ability and willingness of consumers to spend will be an important determinant of the pace of the recovery in coming quarters.”
Later, Mr. Bernanke described the Fed’s economic projection for the rest of this year — growth of about 3.5 percent — and said, “We’ll see if that’s the case.”
Members of Congress questioned Mr. Bernanke repeatedly about the nation’s financial problems, seeking to draw him into agreement with their positions. Mr. Bernanke refused.
“I want to see the numbers add up,” he said. “I want to see the revenues and expenditures balanced. That’s your job and that’s why you get paid the big bucks.”
He warned, however, that Congress needs to raise the debt ceiling, the maximum amount that the federal government is legally entitled to borrow. Failure to do so, he said, would cause a “huge financial calamity.” And he compared the arguments against an increase to “having a spending spree on your credit card and then refusing to pay the bill.”
The hearing included a moment of early levity. Representative Ron Paul, a Texas Republican who favors closing the Fed and has often sparred with Mr. Bernanke, recently announced that he would not run for reelection next year. He opened his remarks Wednesday by suggesting that the news of his departure might have caused Mr. Bernanke to smile.
Amidst the ensuing laughter, Mr. Bernanke was unable to resist.
Article source: http://www.nytimes.com/2011/07/14/business/economy/fed-mulls-options-in-face-of-moderate-outlook-bernanke-says.html?partner=rss&emc=rss
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