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Bernanke Says Solving Fiscal Woes May Bring ‘Very Good’ Year (3)
2012-11-20 18:25:57.281 GMT
(Updates with quote in sixth paragraph.)
By Joshua Zumbrun and Caroline Salas Gage
Nov. 20 (Bloomberg) -- Federal Reserve Chairman Ben S.
Bernanke said that an agreement on ways to reduce long-term
federal budget deficits could remove an impediment to growth,
while failure to avoid the so-called fiscal cliff would pose a
“substantial threat” to the recovery.
“Cooperation and creativity to deliver fiscal clarity --in
particular, a plan for resolving the nation’s longer-term
budgetary issues without harming the recovery -- could help make
the new year a very good one for the American economy,”
Bernanke said in remarks to the Economic Club of New York at the
Marriott Marquis Hotel in Times Square. “The realization of all
of the automatic tax increases and spending cuts that make up
the fiscal cliff, absent offsetting changes, would pose a
substantial threat to the recovery.”
Bernanke’s efforts to bring down 7.9 percent unemployment
and spur the three-year expansion with purchases of $40 billion
in housing debt each month are being impeded by Congress’s
inability to reach agreement to stabilize U.S. outlays and
revenues and avoid the so-called fiscal cliff. Bernanke also
said Fed policy will remain accommodative until the recovery is
on a firmer footing.
Bernanke, 58, said that “uncertainty” about imminent tax
and spending cuts, the ability of Congress to raise the debt
ceiling in a timely manner, and the long-term challenges of
balancing the U.S. budget appear “already to be affecting
private spending and investment decisions and may be
contributing to an increased sense of caution in financial
markets, with adverse effects on the economy.”
Pulling Back
Some businesses are pulling back on concern that hurtling
over the fiscal cliff will damage the economy. Spending on
equipment and software was little changed from June through
September, the weakest reading since the second quarter of 2009,
according to figures from the Commerce Department.
“I do think there’s important potential for the economy to
strengthen significantly if there’s a greater level of security
and confidence about where we’re going as a country,” Bernanke
said in response to a question after the speech.
The Fed chief, in his prepared remarks, repeated his
warning that over $600 billion in spending cuts and tax
increases that could take effect in January could send the
economy “toppling back into recession.”
While Fed policy is “by no means a panacea,” Bernanke
said it is helping the economy.
Recovery Established
“We will want to be sure that the recovery is established
before we begin to normalize policy,” he said.
Stocks declined after Bernanke’s remarks. The Standard &
Poor’s 500 Index fell 0.4 percent to 1,381.54 at 1:24 p.m. in
New York after rising as much as 0.2 percent. The yield on the
10-year Treasury note climbed to 1.64 percent from 1.61 percent
yesterday.
The Fed is also purchasing about $45 billion a month of
longer-term Treasury securities as it replaces the same amount
of short-term debt on its balance sheet. The program, known as
Operation Twist, is designed to lower longer-term interest rates
without increasing the overall size of the central bank’s
securities holdings.
Bernanke’s large-scale asset purchases have pumped up the
central bank’s balance sheet to $2.88 trillion, close to a
record. The so-called quantitative easing has helped reduce
borrowing costs and push down unemployment from a peak in
October 2009 of 10 percent. The Fed cut its target interest rate
to zero in December 2008 and forecasts it will probably hold it
there through at least mid-2015.
Bernanke used his remarks to offer a detailed analysis of
the U.S. economy since the recession and said that the potential
growth has been damaged by the recovery.
Financial Crisis
“The accumulating evidence does appear consistent with the
financial crisis and the associated recession having reduced the
potential growth rate of our economy somewhat during the past
few years,” Bernanke said. This would explain “why the
unemployment rate has declined in the face of the relatively
modest output gains we have seen during the recovery.”
One gauge of unemployment -- which includes those who have
given up searching for work and those who are employed part-time
because they can’t find a full-time job -- stood at 14.6 percent
in October.
Long-term unemployment has also remained elevated
throughout the recovery. Among the unemployed, 40.6 percent have
been without work for 27 weeks or longer.
Source of Strength
At the same time, the housing market has become one of the
economy’s sources of strength as mortgage rates driven to record
lows by the Fed’s asset buying spur higher prices, construction
and builder sentiment. The average fixed rate on a 30-year home
loan fell to 3.34 percent last week, the lowest in four decades
of data, Freddie Mac data show.
New-home construction unexpectedly climbed to a four-year
high in October, a report today showed.
Housing starts rose 3.6 percent to a 894,000 annual rate,
the fastest since July 2008 and exceeding all estimates in a
Bloomberg survey, according to Commerce Department figures. The
median forecast of 82 economists called for an 840,000 pace.
Permits for the construction of single-family homes also
advanced to the highest in four years.
Sales of existing homes rose 2.1 percent in October, and
the median price rose from a year earlier as inventories dropped
to the lowest level in almost a decade, the National Association
of Realtors said yesterday. The National Association of Home
Builders/Wells Fargo index of builder confidence increased to a
six-year high in October.
Housing Market
The recovering housing market has boosted performance at
Home Depot Inc. and Lowe’s Cos., the largest and second-largest
U.S. home improvement retailers. Lowe’s surged the most in more
than three years yesterday after fiscal third-quarter profit
topped analysts’ estimates. Last week, Home Depot also posted
third-quarter profit that topped analysts’ estimates.
“Recently, the housing market has shown some clear signs
of improvement,” Bernanke said, echoing remarks from a Nov. 15
speech in Atlanta.
“It seems likely that, on net, residential investment
will be a source of economic growth and new jobs over the next
couple of years,” he said today, quoting that tight terms from
lenders and underwater borrowers will prevent “the sort of
powerful housing recovery that has typically occurred in the
past.”
President Barack Obama’s re-election this month set up a
showdown over the federal budget with the Republican-controlled
House of Representatives. Economists including Bernanke have
voiced concern that if not averted, the so-called fiscal cliff
could cause a recession.
Many participants at the last Federal Open Market Committee
meeting said doubts over resolution of the U.S. fiscal challenge
is “likely to restrain the pace of economic growth in coming
months,” according to the minutes said. Officials said the
fiscal contraction would put the economic expansion at risk, and
that businesses have already reported “delaying or cutting back
on hiring and capital spending” because of the uncertainty,
according to the minutes.
For Related News and Information:
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Federal Reserve rates, data, news: FED <GO>
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U.S. economic snapshot: ESNP US <GO>
U.S. economic forecasts: ECFC US <GO>
Top economy news: TOP ECO <GO>
Top Fed comments news: NI FEDSPEAK BN <GO> |
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