NEW YORK – The economy is running “well below” potential and job creation is lagging, so monetary policy accommodation remains necessary, especially with medium-term inflationary expectations subdued, Federal Reserve Board Chairman Ben S. Bernanke said at the International Monetary Conference in Atlanta Tuesday.
“The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets,” Bernanke said, according to prepared text released by the Fed. “In this context, monetary policy cannot be a panacea.”
He praised past Fed actions that “have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery” at no cost to taxpayers.
“Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed,” he continued. “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established. At the same time, the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability. As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term. Should that forecast prove wrong, however, and particularly if signs were to emerge that inflation was becoming more broadly based or that longer-term inflation expectations were becoming less well anchored, the Committee would respond as necessary. Under all circumstances, our policy actions will be guided by the objectives of supporting the recovery in output and employment while helping ensure that inflation, over time, is at levels consistent with the Federal Reserve’s mandate.”
