NEW YORK – While moderate economic recovery continues, and should do so into next year, “significant restraints” still hold back the pace of recovery Federal Reserve Board Chairman Ben S. Bernanke testified today.
These restraints include housing, where “sales and construction have been temporarily boosted lately by the homebuyer tax credit. But looking through these temporary movements, underlying housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit,” Bernanke told the House Committee on the Budget, according to prepared text, which was released by the Fed. “Spending on nonresidential buildings also is being held back by high vacancy rates, low property prices, and strained credit conditions. Meanwhile, pressures on state and local budgets, though tempered somewhat by ongoing federal support, have led these governments to make further cuts in employment and construction spending.”
The labor market also continues to restrain growth, he said. Inflation is “subdued.” Despite swings based on volatile food and energy prices, “a moderation in inflation has been clear and broadly based over this period. To date, long-run inflation expectations have been stable, with most survey-based measures remaining within the narrow ranges that have prevailed for the past few years.”
Developments in Europe “roiled” U.S. financial markets recently, and steps have been take in Europe to address these concerns. “The actions taken by European leaders represent a firm commitment to resolve the prevailing stresses and restore market confidence and stability. If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest,” Bernanke said. “Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities. The Federal Reserve will remain highly attentive to developments abroad and to their potential effects on the U.S. economy.”
While the U.S.’s “ fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession,” Bernanke said, “The exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and spending, along with the necessary policy actions taken to ease the recession and steady financial markets. As the economy and financial markets continue to recover, and as the actions taken to provide economic stimulus and promote financial stability are phased out, the budget deficit should narrow over the next few years.”
However, budget deficits must be addressed, he said. He reiterated the aging of the U.S. population will add to government expenditures for health care and retiree benefits. “To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.”
He concluded, “Achieving long-term fiscal sustainability will be difficult. But unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth.”
