NEW YORK – While credit conditions remain tight and the job market weak, accommodative policies will have to be removed “at some point,” Federal Reserve Board Chairman Ben S. Bernanke said today.
The financial crisis “dealt a severe blow to our economy from which we have only recently begun to recover,” Bernanke said, according to prepared text of a speech delivered at the Economic Club of Washington, D.C. “The improvement in financial conditions this year and the resumption of growth over the summer offer the hope and expectation of continued recovery in the new year. However, significant headwinds remain, including tight credit conditions and a weak job market.”
Saying the Federal aggressively moved to stabilize the financial system and to support economic activity. “At some point, however, we will need to unwind our accommodative policies in order to avoid higher inflation in the future,” he said. “I am confident we have both the tools and the commitment to make that adjustment when it is needed and in a manner consistent with our mandate to foster employment and price stability.”
Bernanke also said, “financial firms must do a better job of managing the risks of their business, regulators--the Federal Reserve included--must complete a thoroughgoing overhaul of their approach to supervision, and the Congress should move forward in making needed changes to our system of financial regulation to avoid a similar crisis in the future.” He spoke of the need to solve the problem of "too big to fail."
While not offering any time frame on the removal of policy accommodation, Bernanke said, “Though we have begun to see some improvement in economic activity, we still have some way to go before we can be assured that the recovery will be self-sustaining. Also at issue is whether the recovery will be strong enough to create the large number of jobs that will be needed to materially bring down the unemployment rate. Economic forecasts are subject to great uncertainty, but my best guess at this point is that we will continue to see modest economic growth next year--sufficient to bring down the unemployment rate, but at a pace slower than we would like.”
He added that it appears the recovery will continue next year, the pace of expansion is expected to be moderate.
Acknowledging that some people are “uneasy” about the scope and scale of the Fed’s actions, Bernanke said, the Fed’s action won’t lead to higher inflation. “In the near term, elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here,” he said. “However, as the recovery strengthens, the time will come when it is appropriate to begin withdrawing the unprecedented monetary stimulus that is helping to support economic activity. For that reason, we have been giving careful thought to our exit strategy. We are confident that we have all the tools necessary to withdraw monetary stimulus in a timely and effective way.”
