Bernanke Expects a ‘Moderately Stronger’ Recovery
By SEWELL CHAN
Published: January 7, 2011
The Federal Reserve chairman, Ben S. Bernanke, told senators on Friday that he expected the recovery to be “moderately stronger” this year. He also defended the central bank’s $600 billion program to stimulate the economy by buying government bonds, and urged Congress to put a credible plan in place to reduce the federal deficit.
“We have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold,” Mr. Bernanke told the Senate Budget Committee, in his first testimony to the new Congress. Consumer spending and business investment in new equipment and software are on the rise, he said, but the housing and labor markets remain depressed.
Mr. Bernanke spoke an hour after the Labor Department reported that unemployment had fallen to 9.4 percent, with nonfarm payroll growth that was less than most economists had anticipated.
“It could take four to five more years for the job market to normalize fully,” Mr. Bernanke said, noting that the sector had “improved only modestly at best.”
In a detailed explanation of the Fed’s Nov. 3 decision to resume quantitative easing — a strategy of buying Treasury securities to lower long-term interest rates — Mr. Bernanke emphasized that inflation is expected to be at “historically low levels for some time.”
“Very low inflation increases the risk that new adverse shocks could push the economy into deflation,” Mr. Bernanke said. Deflation typically means very slow growth in wages and incomes and is associated with reductions in living standards.
Mr. Bernanke also said the new, $600 billion round of asset purchases — which is to be carried out through June but is subject to periodic examination — was not dissimilar to conventional monetary policy, which the Fed can no longer use because the overnight interest rate it controls has already been nearly zero since December 2008.
“Conventional monetary policy works by changing market expectations for the future path of short-term interest rates, which, in turn, influences the current level of longer-term interest rates and other financial conditions,” Mr. Bernanke said. “These changes in financial conditions then affect household and business spending. Securities purchases by the Federal Reserve put downward pressure directly on longer-term interest rates by reducing the stock of longer-term securities held by private investors.”
Mr. Bernanke said the Fed remained “unwaveringly committed to price stability” and to the Fed’s long-term, implicit inflation target of “2 percent or a bit less.”
The chairman also offered a more detailed argument about the need for fiscal reform than he has in the past.
“It is widely understood that the federal government is on an unsustainable fiscal path,” he said. “Yet, as a nation, we have done little to address this critical threat to our economy. Doing nothing will not be an option indefinitely; the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be.”
Mr. Bernanke endorsed the findings of President Obama’s fiscal commission, which urged the development of a credible plan for reducing structural deficits, but did not advocate sharp, immediate reductions in spending that could threaten the recovery.
He said growth was affected “not only by the levels of taxes and spending, but also by their composition and structure.” He urged Congress, in working to reduce the deficit, to also enhance the economy’s long-run growth potential — “for example, by encouraging investment in physical and human capital, by promoting research and development, by providing necessary public infrastructure, and by reducing disincentives to work and to save.”