WASHINGTON – Slumping job growth has alarmed some economists who fear the U.S. economy is in trouble.
Ben Bernanke doesn’t appear to be one of them.
The Federal Reserve chief sketched a hopeful outlook in testimony to a congressional panel Thursday and sent no signals that the Fed will take further steps soon to aid the economy.
Bernanke acknowledged that Europe’s debt crisis poses risks to the U.S. financial markets. He also noted that U.S. unemployment remains high at 8.2 per cent. And he said the Fed is prepared to take steps to boost the U.S. economy if it weakens.
But he said Fed officials still need to study the most recent economic trends, including job growth. For now, Bernanke said he foresees moderate growth this year.
He said he’s mindful that all that could change, if Europe’s crisis quickly worsened or U.S. job growth stalled.
“As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate,” he told the Joint Economic Committee.
The Fed could buy more bonds to try to further reduce long-term interest rates, which might encourage more borrowing and spending. Or it could extend its plan to keep short-term rates near zero beyond late 2014 until an even later date.
But most economists don’t expect a major announcement at the Fed’s next policy meeting June 19-20, despite signals this week from some other Fed members in favour of considering further action.
For one thing, long-term U.S. interest rates have already touched record lows. Even if rates dropped further, analysts say they might provide little benefit for the economy. They say it’s unlikely that many businesses and consumers who aren’t borrowing now at super-low rates would do so if rates declined a bit more.
And Bernanke could face pressure not to pursue further stimulus before the November election because such steps could be perceived as helping President Barack Obama win re-election.
“The Fed stimulative effects have really run their course,” Obama’s Republican opponent, Mitt Romney, argued in a television interview last week.
John Ryding and Conrad DeQuadros, economists at RDQ Economics, said there was nothing in the testimony to “tip Bernanke’s hand” before the June meeting of the Fed’s policy committee.
“Yes, the Fed chairman said the Fed stands ready to act if Europe poses a threat to the U.S. financial system or the economy,” they wrote in a note to clients. “However, he gave no specifics.”
An early rally on Wall Street faded after Bernanke signalled no immediate further steps from the Fed to help the economy. The Dow Jones industrial average had been up as much as 140 points. It closed up about 46 points, or 0.3 per cent.
Many analysts are worried that the U.S. economy is suffering a midyear slump just as in 2010 and 2011. They’re concerned in particular about the job market. From December through February, the economy added an average 252,000 jobs a month. But since then, job growth has slowed to a lacklustre 96,000 a month. In May, U.S. employers added just 69,000 jobs — the fewest in a year.
Bernanke said the Fed is still assessing the most recent employment data. Like many economists, Bernanke suggested that a warm winter might have prompted some hiring that normally would have occurred later. That could have weakened hiring temporarily in the spring. If that’s true, hiring might bounce back.
Still, Bernanke said some of the winter hiring might have made up for excessive job cuts during the recession. If so, and if those companies have completed such “catch-up” hiring, then stronger economic growth might be needed to boost hiring, Bernanke said.
“That is the essential question we will have to look at,” he told the panel.
The government said last week that the economy grew at a sluggish annual rate of 1.9 per cent in the first three months of 2012.
Paul Edelstein, an economist at IHS Global Insight, said he thought Bernanke didn’t seem alarmed by the weak hiring in May.
“His view is that it isn’t a sign that the economy is falling apart,” Edelstein said.
Bernanke’s message to financial markets, Edelstein said, was, “Don’t expect anything drastic from the Fed at the June meeting.”
That said, if the Fed does announce some new action at its meeting later this month, Edelstein said the most likely step would be to extend a program, known as Operation Twist, that will expire at the end of June.
Under Operation Twist, the Fed sells shorter-term securities and buys longer-term bonds. As with other Fed bond purchases, the idea has been to drive down long-term rates so that mortgages, auto loans and other consumer and business loans become more attractive.
The Fed’s policy committee has been split between those who favour doing everything possible to strengthen the economy and reduce unemployment, and those more concerned about inflation risks.
On Wednesday, Janet Yellen, the vice chairman of the Fed, Dennis Lockhart, the head of the Atlanta regional Fed Bank, and John Williams, president of the San Francisco Fed bank, all suggested that the Fed might need to do more to provide support.
But Rep. Kevin Brady, R-Texas, warned at Thursday’s hearing against more bond buying. He and other critics worry that ever-lower borrowing rates could eventually ignite inflation.
“It is my belief that the Fed has done all that it can do and has perhaps done too much,” said Brady, vice chairman of the committee.