Bernanke Economy, Close to Faltering

by Don Azarias
December 1, 2011
It registered as a seismic shock in the financial markets when the Federal Reserve chairman, Ben Bernanke, recently said that the economy is “close to faltering.” However, he assured the American public that the Federal Reserve is prepared to take further steps to prevent the struggling economy from collapsing. This marked his bleakest assessment yet of the fragile U.S. economic recovery. I’m not sure if his attempt to reassure the public is enough to prop up the already-distressed businesses to start hiring and the nervous consumers to start buying.
 
Appearing before the Joint Economic Committee of Congress, Bernanke cited high unemployment rate, depressed confidence, and financial risks from Europe as the key factors in slowing down the economic growth. He urged lawmakers not to cut spending too quickly in the short term even as they grapple with trimming the long-run budget deficit. He made it clear that the U.S. central bank’s policy committee considers inflationary pressures well under control and given high unemployment, would be ready to ease monetary conditions further following the launch of a new stimulus measure in September. “The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability. Recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead,” Bernanke said.
 
Bernanke argued price pressures will remain subdued for the foreseeable future. That made it easier for the Fed to launch its latest monetary easing effort in September, when it announced it would be selling $400 billion in short-term Treasuries and using the proceeds to buy longer-dated ones. He estimated the new policy would lower long-term interest rates by about 0.20 percentage point which he said was roughly equivalent to a half percentage point reduction in the benchmark federal funds rate. Already 10-year Treasury note yields are at multi-year lows of 1.83 percent, helping keep mortgage and corporate borrowing costs extraordinarily cheap. “We think this is a meaningful but not an enormous support to the economy. I think it provides some additional monetary accommodation; it should help somewhat on job creation and growth. It’s particularly important now the economy is close——the recovery is close——to faltering. “We need to make sure that the recovery continues and doesn’t drop back and the unemployment rate continues to fall downward,” he said
 
Republican lawmakers pressed Bernanke on whether the Fed’s dual mandate for full employment and price stability meant that it had to make compromises on inflation. On the 2012 presidential campaign trail, Republican candidate, Texas Governor Rick Perry earlier said it would be “treasonous” for the Fed to add further money to the economy. Bernanke was categorical in defending the Fed’s record of price stability in recent decades. He noted inflation has averaged 2.0 percent during his tenure and blamed regulatory failures, not excessively low rates, for the financial crisis.
 
Some economists believe the central bank could announce more concrete targets for policy goals, by linking the path of rates directly to unemployment and or inflation. We may recall that in response to the financial crisis and recession of 2008-2009, the Fed slashed interest rates to effectively zero and more than tripled the size of its balance sheet to a record $2.9 trillion, buying bonds off banks balance sheets. Bernanke said this was not bailing out Wall Street, but was part of its mandate to provide price and financial stability.
 
However, it didn’t help boast consumers’ confidence when the monitoring group and leading authority on business cycles, Economic Cycle Research Institute (ECRI), said late last month that the U.S. economy is tipping into a new recession. It’s boldly predicting that there’s nothing that policy makers and other form of government intervention can do to head it off. It also points out that the debt crisis in Europe is the most obvious potential trigger for a protracted breakdown in the global economy.
 
Most economists and analysts always heed ECRI’s economic predictions because they have correctly called three recessions without any false alarms in-between compared to those who always end up making wrong calls.
 
So now it’s Federal Reserve chairman’s Ben Bernanke’s words versus the ECRI’s. Who do we believe? Who will really make the right call? For most of us, we’ll just have to wait and see.