But sustained growth expected despite recent softening: Bernanke
WASHINGTON: The Federal Reserve stands ready to ease monetary policy further if the budding United States economic recovery withers, Fed chairman Ben Bernanke said on Wednesday, describing the outlook as 'unusually uncertain'.
Policymakers, however, still expect growth to be sustained despite a recent softening in the economy, Mr Bernanke said in congressional testimony, playing down the risk of renewed recession and the possibility of deflation.
'We remain prepared to take further policy actions as needed to foster a return to full utilisation of our nation's productive potential in a context of price stability,' he told the Senate Banking Committee.
Nonetheless, Mr Bernanke said the US central bank was continuing 'prudent planning for the ultimate withdrawal of monetary policy accommodation'.
The Fed has kept interest rates near zero since December 2008 and has bought more than US$1.5 trillion (S$2.1 trillion) in mortgage and Treasury bonds to fight the recession and financial crisis.
The economy resumed growth about a year ago, but stubbornly high unemployment, a fresh drop in housing activity and a slowdown in manufacturing have raised fears of a double-dip recession.
Although Mr Bernanke said the chances of a fresh downturn were not high, US stocks retreated as he testified, with major indices dropping more than 1 per cent. Some investors were surprised by the Fed chief's candid admission of lingering uncertainty, while others were taken aback by the tentative nature of the Fed's plans for further easing.
Asian markets recoiled yesterday after his downbeat outlook, but Shanghai stood firm on improved prospects for earnings and China's property market.
'Reaction is basically turning into a spasm of despair. The market was looking for some form of concrete action from Mr Bernanke; a commitment to do something,' said Mr Brian Dolan, chief currency strategist at Forex.com, on Wednesday.
'All we got was that they're aware of the risks and are prepared to take as yet unspecified actions.'
Pressed on what the Fed could do to ease monetary policy further, Mr Bernanke said it could reinvest mortgage bonds that are rolling off its balance sheet or engage in further debt purchases. It could also lower the rate it pays banks to park their excess reserves at the Fed, he said.
'If the recovery seems to be faltering, then we at least need to review our options. We have not fully done that review,' he said.
While Mr Bernanke left the door open to further easing as he delivered the central bank's semi-annual monetary policy report to Congress, he made clear that officials were still banking on a sustained, if sluggish, economic rebound.
'Although fiscal policy and inventory restocking will likely be providing less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should help sustain growth,' he said.
For now, he said the Fed expects that economic conditions will warrant an exceptionally low benchmark federal funds rate for an extended period - repeating a vow the central bank has kept in place for more than a year.
Mr Bernanke said a weak job market was acting as a drag on consumer spending and that it would take a long time before the economy can restore the nearly 8.5 million jobs lost in the last two years.
Against that backdrop, he indicated that inflation was not a concern and was unlikely to become one any time soon.
In a separate development, the US House of Representatives voted overwhelmingly on Wednesday to temporarily lift tariffs on hundreds of imported raw materials used by US manufacturers struggling in the sour economy.
US President Barack Obama's Democratic allies described the measure, which lawmakers approved 378-43, as a key step in their efforts to boost job creation, with unemployment near 10 per cent just months before key November elections.
The legislation, which must still be approved by Senate, aims to help US manufacturers by reducing production costs.
REUTERS, AGENCE FRANCE-PRESSE
Source: Straits Times, 23 Jul 2010