Bernanke quiet on next Fed moves, stresses job crisis

Federal Reserve Chairman Ben Bernanke on Friday stopped short of detailing further action to boost the U.S. recovery but said the central bank would consider what more it could do to fight high unemployment, giving some comfort to investors.

Bernanke said the Fed had marked down its outlook for U.S. economic growth and said it would extend its September policy meeting to two days from one to consider its options. However, he also said the onus for boosting long-term growth prospects lay at the feet of the White House and the U.S. Congress.

"It is clear the recovery from the crisis has been much less robust than we had hoped," he told an annual Fed conference here.

Under Bernanke's leadership, the U.S. central bank launched an unprecedented array of measures to steer the economy away from what could have been a second Great Depression.

A weak raft of data has led analysts to say chances of a new recession could range as high as 50 percent.

The economy grew at a paltry 1 percent annual rate in the second quarter, the government said on Friday, after growing only 0.4 percent in the first three months of the year. At the same time, Europe is strangled by a debt crisis that is undercutting the recovery there.

"The growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years," Bernanke said. "The economic healing will take a while, and there may be setbacks along the way," he added. "However ... the healing process should not leave major scars."

His optimism carried a caveat. He said if policymakers failed to bring down the "extraordinarily" high level of U.S. long-term unemployment, jobs skills could atrophy, harming the economy's long-run potential.
The jobless rate stood at 9.1 percent in July, with nearly half of the unemployed out of work for 27 weeks or more.
Bernanke's speech met with a volatile reception in financial markets, where some participants had expected fresh details on steps the Fed could take to spur stronger growth.

Stocks initially fell sharply, with the Dow Jones industrial average dropping as much as 220 points, but later recovered as investors saw the door still open a door for a renewed effort at lifting growth. The dollar rallied then gave up some gains, as did bond prices.

EXAMINING OPTIONS

Bernanke made plain the central bank found recent developments troubling, and he said the policy-setting Federal Open Market Committee would expand its September meeting to two days from one to discuss its options.

However, he said most of the policies that would ensure a solid foundation for long-term growth were outside the Fed's province.
He said Europe's debt struggles, a bruising summer political battle over the U.S. budget and a decision by Standard & Poor's to strip the United States of its coveted AAA credit rating lay behind the gut-wrenching market volatility in recent weeks, which had harmed growth prospects.

"Financial stress has been and continues to be a significant drag on the recovery, both here and abroad," he said.

Bernanke said the economy could benefit over the long haul by putting the U.S. budget on a sustainable path, and he suggested Washington explore ways to make the budget process less contentious. However, he also repeated a warning that tightening fiscal policy too soon could harm the fragile recovery.

Julian Callow, an economist at Barclays Capital in London, said incoming economic data would determine if the Fed moves to provide further support for the sputtering recovery.

"He was rather boxed in in terms of what he could say," Callow said. "The markets have been increasing pressure on him to say more, but he needs to take the FOMC with him."

Earlier this month, the Fed said it expected to hold overnight U.S. interest rates near zero for at least the next two years, a move that elicited a rare three dissents.

RECESSION WATCH

As gloomy news on the U.S. economy mounted in recent weeks, stock markets plunged and speculation grew the Fed would crank up its crisis-fighting operation.

Some investors hope the central bank, which has already bought $2.3 trillion in bonds, will launch a fresh round of purchases, although many analysts think more modest steps, such as shifting the Fed's securities holdings into longer maturities, are more likely.

Bernanke simply reiterated language from the Fed's latest policy statement that the central bank was examining its options and was prepared to act as needed, while repeating the Fed's view that easing commodity prices should bring inflation into line with the Fed's 2 percent or under goal.More...