Bernanke Urges Obama and Congress to Do More for Economy

Mr. Bernanke described the nation’s economic health in bleak terms, saying that “the recovery is close to faltering,” and suggested that avoiding another recession might require fresh government action. “We need to make sure that the recovery continues and doesn’t drop back,” he said.

Such talk from a Fed chairman usually means the central bank is preparing to reduce interest rates, and Mr. Bernanke said that the Fed was not ruling out such a step. But on Tuesday, as at other recent appearances, he made clear that his remarks were aimed at the rest of the government.

“Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy,” Mr. Bernanke said. “Fostering healthy growth and job creation is a shared responsibility of all economic policy makers.”

Mr. Bernanke has repeatedly called on Congress to adopt a plan for paying down the federal debt, as well as for reducing inequities and loopholes in the corporate tax code, two ideas that enjoy wide support among economists. On Tuesday he also focused on housing policy, suggesting that the government could help underwater homeowners refinance and also improve the availability of mortgages for potential buyers.

However, the Fed chairman sidestepped a number of questions from Republicans and Democrats seeking his support for specific legislative proposals to reduce the federal deficit or to encourage job creation.

Mr. Bernanke’s critique of Congress mirrors mounting frustrations among some lawmakers over his leadership of the central bank. Some liberals want the Fed to try harder to increase growth by further reducing interest rates or injecting money directly into the economy. Conservatives, meanwhile, warn that any new efforts by the Fed are more likely to harm the economy.

Members of the Joint Economic Committee, where Mr. Bernanke answered questions for about 90 minutes Tuesday, pressed both of those arguments. But Mr. Bernanke remained firm in his position that the Fed already had done a great deal, and that it might do more — but not right now.

The central bank, he said, “is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability.”

In recent speeches, Mr. Bernanke had suggested that the economy did not need much more help, and that growth would pick up speed so long as the government did not interfere, for example, by making sharp cuts to short-term spending. But the Fed, like many private sector forecasters, has been too optimistic in its predictions over the last two years, repeatedly overestimating the pace of growth.

On Tuesday, Mr. Bernanke reiterated the Fed’s forecast that the health of the economy would probably improve, but suggested there was also a significant risk of a second recession unless the government acted to increase growth.

He suggested that Congress should keep four goals in mind: Reducing debts to a sustainable level, avoiding short-term spending cuts that could impede recovery, adjusting spending and tax policies to support growth, and improving the government’s decision-making process.

“There is evident need to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy,” Mr. Bernanke said.

Representative Mick Mulvaney, a South Carolina Republican, said that the central bank’s policy of maintaining low interest rates had made it irresistible for Congress to keep borrowing money rather than rein in federal spending.

“We’re able to borrow so much money right now at a reduced rate; there’s a very strong impetus here to simply put off the tough decisions,” he said.

Mr. Bernanke responded that the Fed was holding down interest rates, but “I don’t think that eliminates the responsibility of Congress to take its own action.”

The Fed’s own recent efforts to increase growth have been modest in scope. The central bank announced in August that it intended to maintain short-term interest rates near zero for at least two more years. In September, it announced an effort to further reduce long-term interest rates by moving $400 billion from investments in short-term Treasury securities to longer-term Treasury securities. Both policies are aimed at reducing borrowing costs for businesses and consumers.

Mr. Bernanke said on Tuesday that the Fed estimated the September program would reduce the interest rate on Treasury securities by about 0.2 percentage points. Analysts estimate that the August program will have a similar impact.

“We think that this is a meaningful but not an enormous support to the economy,” Mr. Bernanke said. “It should help somewhat on job creation and growth.”

But the efforts also have highlighted the limits of the Fed’s power. While it can reduce the cost of borrowing, it has not made it easier for consumers and businesses to qualify for loans. Mr. Bernanke noted the example of mortgage loans, saying that lower interest rates had not increased the volume of new loans.

Article source: http://www.nytimes.com/2011/10/05/business/economy/fed-chief-raises-doubts-on-recovery.html?partner=rss&emc=rss