NEW YORK – Reiterating that the Federal Reserve has a “range of tools” that would provide economic stimulus, Federal Reserve Board Chairman Ben Bernanke said the Federal Open Market Committee is prepared to do what is needed “to promote a stronger economic recovery in a context of price stability.”
“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus,” he said, according to prepared text of his remarks, released by the Fed. “We discussed the relative merits and costs of such tools at our August meeting. My FOMC colleagues and I will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September and are prepared to employ these tools as appropriate to promote a stronger economic recovery in a context of price stability.”
Turning to positives, Bernanke said, the U.S. economy, the largest in the world has “a highly diverse mix of industries and a degree of international competitiveness that, if anything, has improved in recent years. Our economy retains its traditional advantages of a strong market orientation, a robust entrepreneurial culture, and flexible capital and labor markets. And our country remains a technological leader, with many of the world's leading research universities and the highest spending on research and development of any nation. Thus I do not expect the long-run growth potential of the U.S. economy to be materially affected by the financial crisis and the recession if--and I stress if--our country takes the necessary steps to secure that outcome.”
The recovery “has been much less robust than we had hoped,” he acknowledged, “the recession was even deeper and the recovery weaker than we had previously thought.” And growth hasn’t been enough to pull down the unemployment rate.
Household spending remains weak, with a run up in food and gas prices earlier this year prodding consumers to save their money and not borrow anymore. “Indeed, readings on consumer confidence have fallen substantially in recent months as people have become more pessimistic about both economic conditions and their own financial prospects.”
Manufacturing and business investment have expanded. This will help spur the “natural recovery process,” although since the downturn affected the housing market and financial system, the recovery process will remain slowed. The weakness in housing and volatility in financial are just two players in the continued slow recovery. Bernanke said, government spending and the withdrawal of federal stimulus will hurt the recovery.
“There is ample room for debate about the appropriate size and role for the government in the longer term, but--in the absence of adequate demand from the private sector--a substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring,” he said.
“The prospect of an increasing fiscal drag on the economy in the face of an already sluggish recovery highlights one of the many difficult tradeoffs currently faced by fiscal policymakers,” Bernanke added.
He urged policy changes as Baby Boomers age, without which “the finances of the federal government will spiral out of control in coming decades, risking severe economic and financial damage.”
