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us’s Bernanke: Fed to hold off on steps to aid recovery
Bernanke said the Fed would consider action if matters worsened. His comments to the Senate Banking Committee sent stocks tumbling. The Dow Jones industrial average had been up 20 points before he spoke. It fell as much as 160 points during his testimony, but recovered some losses to close down 109 points. Investors shifted money into the safety of Treasury bonds; the yield on 10-year Treasury notes fell to 2.86 percent. “The markets are more paranoid than the Fed is about the economy’s health,” said David Resler, chief US economist at Nomura Securities. Investors wanted to hear a strategy “that will make a second dip a very remote possibility.”
Bernanke downplayed the odds that the economy will slide back into a “double-dip” recession. Still, he acknowledged the recovery is fragile. “If the recovery seems to be faltering, we have to at least review our options,” Bernanke told lawmakers. But he said no further action is planned for now because the economy is still growing.
Record low interest rates are still needed to bolster the economy, Bernanke said. He repeated a pledge to keep them there for an “extended period.” The recovery, which had been flashing signs of strengthening earlier this year, is losing momentum. And fears are growing that it could stall.
Consumers have cut spending. Businesses, uncertain about the strength of their own sales or the economic recovery, are sitting on cash, reluctant to beef up hiring and expand operations. A stalled housing market, near double-digit unemployment and an edgy Wall Street shaken by Europe’s debt crisis are other factors playing into the economic slowdown.
“In short, it look likes our economy is in need of additional help,” said the committee’s chairman, Sen. Chris Dodd, a Connecticut Democrat. Bernanke said the Fed is “prepared to take further policy actions as needed” to keep the recovery on track. Fed policymakers haven’t settled on “leading options” but they are being explored, he said. Those options include lowering the rate the Fed pays banks to keep money parked at the Fed, strengthening the pledge to hold rates at record lows and reviving some crisis-era programs, Bernanke said.
Bernanke is trying to send a positive message that the recovery will last in the face of growing threats. At the same time, he wants to assure Americans that the Fed will take new stimulative actions if necessary. With little appetite in Congress to provide a major new stimulus package, more pressure falls on Bernanke to keep the recovery going. Bernanke and his Fed colleagues have cut their forecasts for growth this year. If the recovery were to flash serious signs of backsliding, the Fed could revive programs to buy mortgage securities or government debt. It could cut to zero the interest rate paid to banks on money left at the Fed or lower the rate banks pay for emergency Fed loans. The Fed also could create a new program to spark more lending to businesses and consumers in a bid to lure them to ratchet up spending and grow the economy.
Bernanke said the debt crisis in Europe, which has rattled Wall Street, played a role in the Fed’s “somewhat weaker outlook.”
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