Fed Bleak On Economic Recovery

Ben Bernanke testifies in front of congress. Photo courtesy of wikicommons

Federal Reserve Chairman Ben Bernanke’s semi-annual report to congress was bleak.

“The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of the year,” Bernake said.

June’s job report was underwhelming. After adding nearly 200,000 jobs per month during the fourth quarter of 2011 and the first quarter of 2012, the average employment increased by 75,000 per month in the second quarter of the year. The jobless rate has leveled out at about 8 percent, Bernanke said.

Household spending also declined in the second quarter and overall level of confidence remains low, Bernanke said.

The housing market has shown signs of improvement Bernanke said, but still has problems. Purchasers are deterred by economic concerns. Other prospective buyers can obtain loans because of tight lending standards, poor credit or underwater mortgages – they owe more than their homes are worth.

Forward-looking indicators of investment demand suggest further weakness ahead.

Add it all up and Bernanke says growth projections are much lower than previously expected. In June, the Fed lowered 2012 projections for growth from 2.2 percent – 2.7 percent to 1.9 percent – 2.4 percent. And Bernanke doesn’t expect it to get much better.

“However, given that growth is projected to be not much above the rate needed to absorb new entrants to the labor force, the reduction in the unemployment rate seems likely to be frustratingly slow.”

He expects the unemployment rate to be around 7 percent in 2014.

It could get worse

As bad as the indicators are, it could get even worse, Bernanke said. The Euro zone crisis could leave American banks with bad debt.

“Europe’s financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United States. Moreover, the possibility that the situation in Europe will worsen further remains a significant risk to the outlook,” Bernanke said.

Partisan politics also threaten the economy. Tax increases and spending cuts are scheduled to happen at the beginning of the year if congress can’t get a deal done. According to the Congressional Budget Office, if all of the tax and spending measures were to occur together the economy would grow at just 0.5 percent in 2013 compared to 4.4 percent without the measures.

Bernanke said if a deal doesn’t get done it will cause a “shallow recession” and a loss of about a million jobs.

“The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery, Bernanke said. “Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.”

Action Plan

With the economic recovery stalled and inflation below 2 percent, Bernanke said he was prepared to take action, but he didn’t say whether he would begin another round of easing monetary policy, such as buying long-term treasury bonds and selling short-term treasury bonds to inject cash into the market.

“We haven’t really come to a specific choice (on how to help the economy) at this point” Bernanke said, but the Fed is exploring ways to strengthen the recovery.

However, some people in Washington believe it’s time for Congress to act and stop relying on the Fed.

“I candidly wish we would have a chairman of the Fed  who would say to the Fed ‘quit looking to us,'” Senator Bob Corker, R-Tenn. said. “Are you tempted to ever say that to Congress?”

Bernanke said he will continue to try and help the economy recover, but wouldn’t mind if congress stepped in.

“Congress is in charge here, not the Federal Reserve,” Bernanke said.

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