Reuters | Aug 28, 2010 | 4:09am IST
U.S. Federal Reserve Chairman Ben Bernanke said on Friday the economic recovery has weakened more than expected and the Fed stands ready to act if needed to spur slowing growth. Bernanke downplayed concerns that the economy might slip back into recession, predicting a modest expansion in the second half of this year, with the pace picking up in 2011. Otherwise, he said the Fed has sufficient ammunition left and could support growth by purchasing more government debt or by promising to keep rates exceptionally low for a longer period than currently priced in by financial markets. Bernanke’s comments, in an address to an annual conference of global central bankers hosted by the Fed in Jackson Hole, Wyoming, came as the government reported the economic growth rate in the second quarter was weaker than it had originally estimated. Bernanke made clear that the U.S. central bank has not decided what would prompt additional easing. "The overall tone was one of watch and wait," Goldman Sachs economist Jan Hatzius wrote in a note to clients, "despite ongoing signs that U.S. economic activity has not only dropped below its potential growth rate but has a significant probability of weakening further."
While Bernanke focused on near-term issues in the U.S. economy, the head of the European Central Bank, Jean-Claude Trichet, also speaking at the Jackson Hole conference, addressed long-term global challenges. He urged governments and central banks to ensure that the transition from very high debt levels incurred in response to the global financial crisis and its economic fallout takes place in an orderly fashion and without compromising economic growth. "The primary macroeconomic challenge for the next 10 years is to ensure that they do not turn into another ‘lost decade,’" Trichet told the conference. In Japan, which has experienced decades-long stagnant growth, the Bank of Japan is examining holding an emergency meeting early next week to ease monetary policy as the strong yen threatens the country’s fragile economic recovery, a source familiar with the matter said. An emergency meeting may be held as early as Tuesday.
Hopes for a speedy U.S. recovery have been dashed by a string of disappointing reports on employment, housing and manufacturing. Economists have slashed third-quarter growth forecasts in the past couple of weeks and now see the change of a double-dip recession at 25 percent, up from 15 percent in early July, according to a Reuters poll on Friday. With interest rates held at ultra-low levels since December 2008, the Fed has taken other measures, pumping about $1.7 trillion into the economy. Bernanke said the U.S. central bank’s purchases of longer-term securities have been effective in lowering borrowing costs and that he believes the benefits of buying more such assets, if needed, would outweigh any disadvantages.
He said other options to spur economic growth — such as committing to hold interest rates exceptionally low for an even longer period than is currently priced in to financial markets, or raising the Fed’s inflation targets — would be less effective in the current environment. Bernanke stressed that the high jobless rate remains a concern to policy makers, and said the Fed would be vigilant against deflation. "Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability," he said. Investors and economists said Bernanke’s remarks indicated that he favored more quantitative easing measures. He said while the exit from recession was driven primarily by fiscal and monetary stimulus measures and inventory rebuilding by businesses, a "hand-off" to consumer demand appeared to be under way.