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Wednesday, April 25, 2012

Bernanke says Fed still ready to act if it's needed




Fed Chairman Ben Bernanke offered his views on the economy and inflation in a wide-ranging news conference.
Even as the economy shows signs of slowing and the unemployment rate remains stuck at painfully high levels, Federal Reserve Chairman Ben Bernanke spent much of a news conference Wednesday explaining why central bankers have decided --  for now -- to do nothing.
Earlier in the day, the central bank's policy-making Open Market Committee repeated its promise to leave interest rates on hold at current rock-bottom levels until at least late 2014. But it gave little guidance on whether it might take additional steps later this year to try to boost growth.
"We remain entirely prepared to take additional balance sheet actions if necessary to achieve our objectives," Bernanke told reporters. "So those tools remain very much on the table, and we would not hesitate to use them should the economy require that additional support."
In June, the Fed is scheduled to wrap up its latest effort to spur growth, one of a series of moves since the financial collapse of 2008 to buy up more than $2 trillion in bonds to force interest rates lower. Until recently, the U.S. economy has been moving strongly enough to allow policymakers to hold off on efforts to force rates even lower.
But as Fed officials wrapped up a two-day meeting on Wednesday, the government reported that orders for durable goods plunged 4.2 percent in March, the biggest drop since the economy was contracting sharply in early 2009. It was the latest sign that the U.S. economy began slowing again at the end of the first quarter.
In its official statement, the Fed described the economy as expanding moderately, just as it did in March, and noted that the unemployment rate had declined but remains elevated at 8.2 percent. Officials noted a pickup in inflation but said the latest price increases, driven largely by higher oil costs, are likely only temporary.  Economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014," the central bank said.
Related: Full text of the Fed's statement
For now, in other words, the best policy is to wait and watch for signs that those record low interest rates are working.
"The committee is solidly in this camp," said economist Laurence Meyer, a former Fed governor. "If the economy plays out as expected and reflected in the forecast, they are not going to do anything. On the other hand, there's some threshold, there's some deterioration in the outlook that would motivate" more aggressive moves.
"We haven't passed that threshold by any means, and we have to see a deterioration to get that. "
But the Fed acknowledged that an already weak economic rebound will likely weaken a bit further before it gains strength.
U.S. gross domestic product expanded at a 3 percent annual rate in the fourth quarter but is widely estimated to have slowed to around a 2.5 percent pace in the first three months of this year. The government will release its preliminary estimate for first quarter GDP on Friday.
Forecasting the economy's direction and the future course of inflation and interest rates is never easy. But central bankers around the world face an unusually cloudy future as they try to predict what comes next.
Financial turmoil in Europe, tamed temporarily by a series of fragile agreements, appears to be resuming. Though the immediate threat of a Greek bond default was averted, longer-term measures that were pieced together to stabilize the faltering economies of Spain, Portugal and Italy appear to be coming apart.
The collapse of the Dutch government, renewed fears about the solvency of Spanish banks and the narrow first round re-election defeat of French president Nicolas Sarkozy have rattled investors. Those developments have also underscored deep political divisions over how to tame bloated government debt levels without driving the European economy further into recession.
"Progress has been made, but obviously judging by market conditions there a lot more to be done," Bernanke said.
Bernanke and the Fed face a similar unknown at home as two powerful budget forces -- the expiration of Bush-era tax cuts and "automatic" spending cuts agreed to last August -- threaten to collide at the end of the year. Some Fed watchers have suggested that as the November election approaches, central bank policymakers will be increasingly reluctant to make major changes in an effort to appear to remain above the political fray.
Bernanke's regularly scheduled press conference continues the Fed's efforts of attempting to shed more light on its deliberations. With its new policy of offering detailed forecasts and a pledge to hold interest rates steady well into the future, the central bank also is in uncharted waters.
There's always a chance the Fed's forecast is too pessimistic -- and that the economy will gain strength more quickly, forcing the unemployment rate lower and raising the risk of higher inflation.
That could be bad news for the financial markets, especially investors holding Treasury bonds, who would lose money as interest rates move higher. (Rising rates lower the value of bonds already in the market because those existing pay less than a newly-issued bond with higher rates.)
That's why the Fed is expected to give investors plenty of warning if and when it decides rates need to go higher.
Still, central bankers are probably better off with a forecast that's too conservative, even if it means getting caught off-guard down the road by a stronger-than-expected economic rebound.
"Who else will complain if the Fed has to raise rates in 2013 because the economy turns out to be stronger than expected?" said Ian Shepherson, chief U.S. economist at High Frequency economics. "Sometimes it's good to be proved wrong."

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