NEW YORK – Acknowledging that financial conditions in the U.S. have improved considerably in the past year, Federal Reserve Board Chairman Ben S. Bernanke warned that “significant economic challenges remain,” which is why the Federal Open Market Committee sees the Fed funds rate target remaining “exceptionally low” for a long time.
“The Federal Open Market Committee continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” Bernanke told the Economic Club of New York, according to prepared text of his remarks, which were released by the Fed. “Of course, significant changes in economic conditions or the economic outlook would change the outlook for policy as well. We have a wide range of tools for removing monetary policy accommodation when the economic outlook requires us to do so, and we will calibrate the timing and pace of any future tightening to best foster maximum employment and price stability.”
Among the challenges Bernanke sees ahead, he mentioned constrained flow of credit, weak economic activity, and high unemployment, and he noted other setbacks are possible. But, he hailed policymakers for bringing the financial system and economy “back from the brink. The stabilization of financial markets and the gradual restoration of confidence are in turn helping to provide a necessary foundation for economic recovery. We are seeing early evidence of that recovery: Real gross domestic product (GDP) in the United States rose an estimated 3-1/2 percent at an annual rate in the third quarter, following four consecutive quarters of decline. Most forecasters anticipate another moderate gain in the fourth quarter.”
Additionally, the outlook for 2010 is unclear, with some observers expecting “further weakness or even a relapse into recession,” because the factors that spurred the beginnings of recovery were short-lived policies that “are likely to provide only temporary support to the economy.” Others, he noted, see “fundamental improvements, including strengthening consumer spending outside of autos, a nascent recovery in home construction, continued stabilization in financial conditions, and stronger growth abroad.”
Bernanke said he believes “the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds--in particular, constrained bank lending and a weak job market--likely will prevent the expansion from being as robust as we would hope.”
The jobs situation, Bernanke said, was basically the market “getting worse more slowly.” He added, “Given this weakness in the labor market, a natural question is whether we might be in for a so-called jobless recovery, in which output is growing but employment fails to increase.” Employment gains, Bernanke said, “may be modest during the early stages of the expansion.”
