Bernanke Says ‘Nascent’ Recovery Requires Low Rates

Federal Reserve Chairman Ben S. Bernanke said the U.S. economy is in a “nascent” recovery that still requires low interest rates to encourage demand by consumers and businesses once federal stimulus expires.
By: Craig Torres: Bloomberg.com
“A sustained recovery will depend on continued growth in private-sector final demand for goods and services,” Bernanke told the House Financial Services Committee today in Washington at the start of his two days of semi-annual testimony before Congress. “Private final demand does seem to be growing at a moderate pace.”

The 56-year-old Fed chairman, who began his second four- year term this month, said slack labor markets and low inflation will allow the Federal Open Market Committee to keep the benchmark lending rate, which has been in a range of zero to 0.25 percent for more than a year, low “for an extended period.” He said the Fed will need to start tightening policy “at some point.”
“The FOMC continues to anticipate that economic conditions - including low rates of resource utilization, subdued inflation trends, and stable inflation expectations - are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” he said.

The Standard & Poor’s 500 Index rose 1 percent to 1,105.05 at 10:50 a.m. in New York. The yield on the benchmark 10-year note fell two basis points, or 0.02 percentage point, to 3.66 percent in New York, according to BGCantor Market Data.

Decision Last Week

Bernanke’s testimony follows the Federal Reserve Board’s decision last week to raise the cost of direct loans to banks by a quarter-point to 0.75 percent. The Fed portrayed the move as a “normalization” of bank lending and said it didn’t change the outlook for the economy or monetary policy, a message the Fed chairman reiterated today.

Bernanke cited “tentative” signs of stabilization in labor markets such as fewer job losses, a rise in manufacturing employment, and stronger demand for temporary help.

“Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce,” Bernanke said. He said the 40 percent of the unemployed who have been without work for six months or more are a “particular concern.”

Policy makers are trying to ensure a durable expansion that will start generating enough jobs to bring down an unemployment rate they forecast to end the year at 9.7 percent, above their estimate of full employment of around 5 percent. At the same time, they want to convince investors that they can start withdrawing $1.1 trillion in excess cash from the banking system in time to keep inflation at bay.

Inflationary Pressures

“As the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures,” the Fed chairman said. “Notwithstanding the substantial increase in the size of its balance sheet associated with its purchases of Treasury and agency securities, we are confident that we have the tools we need to firm the stance of monetary policy at the appropriate time,” he said.

Manufacturing is leading the rebound from the worst recession since the 1930s as companies prevent inventories from being further depleted and invest in new machinery and equipment to take advantage of a rebound in global demand.

The economy grew at a 5.7 percent annual pace in the fourth quarter of last year, the fastest in six years. Fed officials last month forecast growth in 2010 of 2.8 percent to 3.5 percent, and minutes of their January meeting showed they are seeking more evidence the recovery is sustainable.

Conditions Improved

Bernanke said that conditions in financial markets have improved, making equity and debt financing available for larger firms. “In contrast, bank lending continues to contract, reflecting both tightened lending standards and weak demand for credit amid uncertain economic prospects,” he said.

The Fed has expanded its balance sheet to $2.28 trillion in an attempt to supplement credit to the economy. U.S. central bankers are finishing up a $1.43 trillion program of mortgage- backed securities and housing agency debt purchases next month.

“The FOMC will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets,” Bernanke said.

The actions by the central bank haven’t stimulated private bank credit. Total loans and leases by banks in the U.S. have fallen 7 percent for the 12 months ending January. Consumer loans have fallen 6.5 percent over the same period.

‘Sustained Job Growth’

“They want to see sustained job growth and credit growth to small businesses,” Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut, said before the testimony was released. “The Fed is going to keep rates low and the balance sheet big until you see those two things start recovering.”

The Fed’s actions to combat the financial crisis have led to scrutiny of the central bank in Congress, which is drafting the biggest overhaul of financial regulation since the 1930s.

The House voted Dec. 11 to approve a proposal by Representative Ron Paul, a Republican from Texas, to end a ban on audits of monetary policy. House legislation would also strip the Fed of consumer-protection powers and give the authority to a new agency. A Senate discussion draft proposed stripping the Fed of all bank supervisory powers.

Emergency Powers

Bernanke said the use of emergency powers to support businesses and firms other than banks created a “special obligation” to the Congress and the public. He invited the Government Accountability Office to inspect the Fed’s facilities.

“We are also prepared to support legislation that would require the release of the identities of the firms that participated in each special facility after an appropriate delay,” he said.

Monetary policy, he said, must be shielded from political pressures to protect independence.

“It is vital that the conduct of monetary policy continue to be insulated from short-term political pressures so that the FOMC can make policy decisions in the longer-term economic interests of the American people,” he said.

Industrial production in the U.S. rose more than anticipated in January as factories churned out more consumer goods and equipment. The 0.9 percent increase followed a 0.7 percent gain the prior month, according to Fed data.

Analysts’ Estimates

Deere & Co., the world’s largest maker of farm machinery, posted first-quarter profits Feb. 17 that topped analysts’ estimates and raised its 2010 forecast as projections improved for agricultural-equipment sales in the U.S. and Canada.

Job losses are damping the confidence of consumers whose spending accounts for 70 percent of the world’s largest economy. The Standard & Poor’s 500 Stock Index has fallen 1.8 percent this year, after rising 23 percent in 2009.

Consumption rose at a 2 percent annual pace in the final three months of 2009, below the 2.8 percent pace the previous quarter. The New York-based Conference Board said yesterday that its consumer confidence index fell this month to the lowest level since April 2009.

Wal-Mart Stores Inc., the world’s largest retailer, reported fourth-quarter sales on Feb. 18 that trailed its projection after cutting grocery and electronics prices, and predicted a “challenging” first quarter for U.S. stores.