Bernanke says Fed to act if Europe crisis deepens
REUTERS
WASHINGTON: US Federal Reserve Chairman Ben Bernanke said the US central bank was ready to shield the economy if financial troubles mount, but offered few hints that further monetary stimulus was imminent.
He told Congress the Fed was closely monitoring “significant risks” to the US recovery from Europe’s debt crisis, but struck a decidedly different tone from the central bank’s No. 2 official, who argued for monetary support on Wednesday.
For investors hungry for clues about the prospect for a third round of Fed bond buys, Bernanke’s testimony disappointed.
“The Federal Reserve remains prepared to take action as needed to protect the US economy in the event that financial stresses escalate,” Bernanke told the Joint Economic Committee.
Stocks pared gains on Bernanke’s remarks, but remained in positive territory following a steep rally on Wednesday, while the dollar strengthened against the euro.
“It doesn’t really settle the debate,” said Vassili Serebriakov, senior currency strategist at Wells Fargo.
“There was some hope for more concrete signs, a clearer hint, that further easing is forthcoming, and I don’t think we got that today.”
Slowing US job creation, evident in surprisingly weak employment data last Friday, and an escalation in the euro zone’s crisis had raised expectations of Fed action, perhaps as early as the central bank’s next meeting on June 19-20.
Yet Bernanke’s tone was far from crisis mode.
Indeed, he sounded somewhat sanguine about the outlook.
“Economic growth appears poised to continue at a moderate pace over coming quarters,” he said. “Despite economic difficulties in Europe, the demand for US exports has held up well.”
Fed Vice Chair Janet Yellen made the case on Wednesday for acting before the economy worsened, whether through outright bond purchases or other means, given what she said were “a number of significant downside risks” to growth.
Bernanke made no such suggestion, although Europe was not his only worry spot. He told legislators tighter US fiscal policies set to kick in early next year barring congressional action “would, if allowed to occur, pose a significant threat to the recovery.”
The government said last Friday that US employment growth slowed for a fourth straight month in May, with employers adding a paltry 69,000 workers to their payrolls. Bernanke said the numbers could signal that faster economic growth was needed to keep the labor market on a path of steady improvement.
He said the main question Fed policymakers will face later this month is: “Will economic growth be sufficient to achieve continued progress in the labor market?“
However, Bernanke said he did not want to prejudge the outcome of the meeting.
The debate will likely be heated, given the range of views among officials, which were on display this week as several regional Fed bank presidents offered varying degrees of support for the notion of more stimulus.
The US recovery appears increasingly at risk with worries about Spain’s banks and concerns about the potential outcome of a key election in Greece, which occurs just days before the Fed meets, unsettling global financial markets.
Growth in major emerging economies like Brazil, India and China has also slowed sharply. China responded on Thursday with its first interest rate cut since 2008.
In contrast, the European Central Bank on Wednesday and the Bank of England on Thursday held fire.
The Fed has kept benchmark US interest rates near zero since late 2008 and has expanded its balance sheet sharply to nearly $3 trillion to keep long-term borrowing costs down.
Its most recent stimulus program, known as Operation Twist, is set to expire at the end of June. That program involves selling shorter-dated Treasury securities and buying longer-term ones in an effort to press long-term rates lower.
Short of expanding its balance sheet through outright bond purchases, the Fed could extend Operation Twist.
An even less drastic option would be to push its conditional pledge to keep interest rates low through at least late 2014 further into the future.
Bernanke says Fed to act if Europe crisis deepens
