Offering no real clues on the future direction of monetary policy, Bernanke sounded cautiously more upbeat than he had in his most recent public remarks. He cited improvements in consumer spending and a drop in jobless benefit claims as hopeful signs a languid recovery was perking up.
“We have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold,” the central bank chief said in his first testimony to Congress since the Fed launched a controversial plan to buy an extra $600 billion in government bonds.
Just a month ago, in an interview on the CBS program “60 Minutes,” Bernanke voiced a degree of trepidation about the economy’s rebound.
His remarks on Friday were made public just an hour after the government reported the economy generated a disappointing 103,000 jobs in December.
Bernanke, who said it would take four to five years for the labor market to get back to normal, showed no inclination toward cutting short the Fed’s bond purchase program, designed to stimulate the economy. But he also offered no hints of further buying beyond the program’s June deadline.
“The Fed will not rush for the exit,” said Lena Komileva, economist at Tullett Prebon. “The potential for further (easing) remains if weak labor and housing activity continue to depress inflation trends.”
Financial markets, which focused on the new jobs data, showed little reaction to Bernanke’s remarks.
The U.S. jobless rate dropped to 9.4 percent in December, the lowest rate since May 2009 and down from 9.8 percent a month earlier, but the decline was partly due to a troubling rise in the number of people exiting the workforce.
Echoing Bernanke, Fed Board Governor Elizabeth Duke said in a separate speech that the recovery appeared to be gathering steam, but both hiring and inflation would likely remain subdued.
“I am encouraged by signs that the recovery may have gained traction recently,” Duke said.
The improvement in the economic backdrop has prompted Wall Street investors to begin pondering a possible reversal in Fed policy as early as the end of this year. In the summer, few expected anything in the way of monetary tightening until at least 2012.
Highlighting lingering concern at the Fed about how deep a hole the economy must climb out of, another official emphasized that the bond-buying program had been necessary to lift a recovery that was too weak to dent high unemployment.
“More recent data have been coming in somewhat stronger,” Chicago Fed President Charles Evans said in a speech. “But they do not yet point to the kind of robust, self-perpetuating recovery that we need in order to close today’s large resource gaps within a reasonable amount of time.
Evans is one of the most outspoken backers of aggressive Fed actions to spur growth, and is a voter on the central bank’s policy-setting panel in 2011.
DEFLATION RISK SMALLER, NOT GONE
In his testimony to the Senate Budget Committee, Bernanke defended the Fed’s bond purchases by highlighting the weakness in employment and what he saw as the risks associated with very low rates of inflation.
“Persistently high unemployment, by damping household income and confidence, could threaten the strength and sustainability of the recovery,” Bernanke said.
“Very low inflation increases the risk that new adverse shocks could push the economy into deflation. Deflation induced by economic slack can lead to extended periods of poor economic performance.”
Many conservative Republicans have blasted the bond-buying plan as risking inflation. The tone of the hearing, however, was largely respectful, although Republican Senator Jim Sessions of Alabama said he did not share Bernanke’s confidence that the central bank would be able to withdraw its stimulus in time.
Addressing the budget deficit, a hot topic in Washington now that newly empowered Republicans are pushing for spending cuts, Bernanke urged lawmakers to take a go-slow approach.
“Fiscal policy makers will need to continue to take into account the low level of economic activity and the still-fragile nature of the economic recovery,” he said.
At the same time, Bernanke came down hard on what he described as an unsustainable long-term fiscal path.
“Doing nothing will not be an option indefinitely,” Bernanke said. “Diminishing confidence on the part of investors that deficits will be brought under control would likely lead to sharply rising interest rates on government debt, and, potentially, to broader financial turmoil.”
He threw his support behind proposals to reform the tax code, saying lower rates and fewer loopholes were needed to make the system more efficient.
Copyright © 2011 Reuters