Bernanke: With unemployment this bad, Fed can do more

9:30 AM Bernanke, fed, unemployment No Comments

Ted S. Warren / AP

Federal Reserve Chairman Ben Bernanke, left, and Stanley Fischer, governor of the Bank of Israel speak outside the symposium on Friday in Jackson Hole, Wyo.

By PAUL WISEMAN, Assocaited Press
JACKSON HOLE, Wyo. -- Chairman Ben Bernanke made clear Friday that the Federal Reserve will do more to boost the economy because of high U.S. unemployment and an economic recovery that remains "far from satisfactory."

He also argued that the Fed's moves so far to keep interest rates at record lows and encourage borrowing and spending have helped bolster the economy.

Bernanke stopped short of committing the Fed to any specific move, such as another round of bond purchases to lower long-term rates. But in a speech at an annual Fed conference in Jackson Hole, Wyo., Bernanke said that even with rates at super-lows, the Fed can do more.

After Bernanke's comments were released at 10 a.m. Eastern time, stocks initially gave up most of their earlier gains. But as investors digested the speech, stocks bounced back. By late morning, the Dow Jones industrial average was up more than 100 points. Broader stock indexes also surged.

Bernanke noted that further action carries risks but says the Fed can manage them. The Fed "should not rule out" new policies to improve the job market, he said.

The most dramatic step the Fed could take would be another round of bond buying. This is known as quantitative easing, or QE. In two rounds of QE, the Fed bought more than $2 trillion of Treasury bonds and mortgage-backed securities. Many investors have been hoping for a third round — QE3— to be unveiled as soon as the Fed's next policy meeting in September.

In light of Bernanke's comments Friday, some analysts said that might be a stronger possibility now.

"Bernanke has taken a further step along the path to more policy stimulus, most likely a third round of asset purchases (QE3) to be announced at the mid-September FOMC meeting," said Paul Dales, senior U.S. economist at Capital Economics.

At the same time, the Fed chairman avoided hinting of any one policy move or any timetable.

"This is really all he could say," says Steven Ricchiuto, chief economist at Mizuho Securities. "He is not at liberty to promise anything without the (policy) committee's approval, and there seems to be various opinions on the committee about the best way forward."

In his speech, Bernanke cited studies showing that the Fed's first two rounds of bond purchases created at least 2 million jobs.

"It is important to achieve further progress, particularly in the labor market," Bernanke said. "The Federal Reserve will provide additional policy accommodation as needed."

That remark echoed what the Fed had said in a statement after its most recent policy meeting, July 31-Aug. 1. Since then, somewhat stronger economic news had led some analysts to say the Fed might now feel less urgency to act. But Bernanke's reiteration Friday of the Fed's readiness to provide more help suggested that his economic outlook remains dim.

The U.S. economy is still struggling to grow. It expanded at a tepid 1.7 percent annual rate in the April-June quarter, the government estimated Wednesday.

The minutes of the Fed's July 31-Aug. 1 policy meeting showed that officials spoke with increased urgency about the need to provide more help for the U.S. economy.

The policy committee decided that action "would likely be warranted fairly soon" unless it saw evidence of "a substantial and sustainable strengthening" of the economy. After it meets in mid-September, the Fed's policy committee will meet once more, in late October, before the November elections.

QE3 isn't the Fed's only option. It already plans to keep short-term interest rates near zero through late 2014 unless the economy improves. It could settle for extending that pledge into 2015.

Mark Zandi, chief economist at Moody's Analytics, is among those who think the Fed will extend its timetable for record-low rates into 2015 at the September policy meeting. And unless the economy improves, Zandi expects the Fed to launch another round of bond purchases after the election.

Bernanke's comments Friday made clear that the economy has a long way back to full health.

"Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time," he said.

At the end of every August, economists and central bankers convene in the Rocky Mountains at a symposium organized by the Federal Reserve Bank of Kansas City. They present papers and argue about economic issues. But mostly, they wait to see what the Fed chairman has to say.

In August 2010, Bernanke hinted during his remarks at Jackson Hole that the Fed might begin a second round of bond purchases, a policy called quantitative easing, or QE2. The Fed started buying bonds three months later.

Many analysts think a third round of bond purchases — QE3 — would include both Treasurys and mortgage-backed securities.

Below, a CNBC panel discusses how markets may react to the speech and if Bernanke is laying the ground for more activism from the Fed.

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Bernanke unlikely to tip Fed hand in speech

7:00 PM Bernanke, speech, unlikely No Comments

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Federal Reserve Chairman Ben Bernanke's address Friday in Jackson Hole, Wyo., will be closely scrutinized for hints of future central bank action.

It is annual rite rite of late summer: The Federal Reserve chairman flies far beyond the Beltway to scenic Jackson Hole, Wyo., for a major address on monetary policy.

When central bank chairman Ben Bernanke takes part in the ritual Friday, his influential audience will be hanging on every word, listening for any hint of what policymakers might do next month to spur the sluggish economy. Pundits and the few journalists invited will quickly rush out to expound on Bernanke's speech, taking advantage of the telegenic setting against the Teton mountains.

But don't hold your breath. Most Fed watchers expect Bernanke to avoid tipping his hand ahead of the Sept. 12-13 rate-setting meeting, especially given recent signs of a slight firming in the economy.

The title of the Friday morning speech, "Monetary Policy Since the Crisis," suggests Bernanke "might take a broad ‘lessons learned’ approach” rather than lay out potential next steps, Goldman Sachs economists said in a note.

In part that is because the Fed has little ammunition left after five years of slashing interest rates to rock-bottom levels and injecting cash into the economy through other means. But also it is because economic data are beginning to show signs of improvement, and central bankers will want to gather as much data as possible before acting.

In particular the August jobs data, due to be published Sept. 7, could be key to Fed thinking.

“If the chairman's thought process is anything like ours, he has not yet decided whether to press for a substantive easing move as soon as Sept. 13,” Credit Suisse chief economist Neal Soss said in a recent note.

Investors are waiting to see whether the Fed will go forward with a third round of bond buying, aka quantitative easing, aka QE3.

At its last meeting, which ended Aug. 1, Fed policymakers agreed they were ready to act “fairly soon unless incoming information pointed to a substantial and sustainable strengthening” of the economy, according to minutes released last week.

Since then, data has shown that the housing market continues to rebound, and the economy grew at a slightly faster pace last spring than previously reported.

“It is not clear whether these positive developments are compelling enough to postpone what had looked like a strong chance of a September 13 QE3 announcement,” Soss said, referring to the past month's worth of data.

Indeed, the Fed itself issued a report Wednesday that showed manufacturing activity slowing in many parts of the country in July and August.

Joseph Gagnon, senior fellow at Peterson Institute for International Economics, noted that Bernanke probably will at least want to study upcoming employment and manufacturing data before making any decisions.

“What he might say (Friday could) give us a hint of how he views the incoming data," Gagnon said.

The uncertainty of what the upcoming numbers will show could lead to a speech that disappoints investors hoping for a road map.

“Since the August meeting, I think the data has improved enough to push off QE3, but we may see something on the rate guidance front,” said Michael Gapen, director of U.S. economics and asset allocation for Barclays.

"I think the market after the minutes is very focused on the question of when, and I don't think he’s going to give much clarity on that," said Lewis Alexander, chief U.S. economist for Nomura.

The “benefits and costs” of monetary stimulus measures mentioned in the latest Fed minutes gave some analysts hope that Bernanke, in his speech Friday, will catalog the different actions the Fed is considering and potentially indicate which actions are at the top of the list.

Besides adding to the money supply via either finite or open-ended purchases of Treasuries or mortgage-backed securities, Bernanke could discuss a commitment to keeping rates low even further into the future, discount window lending and changing the rate the Fed pays banks to warehouse their cash reserves with it. Already the Fed is on record that it plans to keep interest ratest at current "exceptionally low levels" at least through late 2014.

CNBC's Steve Liesman, provides a preview of Fed chief Bernanke's speech at Jackson Hole and whether investor are likely to hear hints of additional quantitative easing.

In discussing the costs, Bernanke could certainly mention the potential for inflation over the next few years. The chairman also might broach the topic of whether an increase in the money supply would overheat the stock market, otherwise distort financial markets or encourage poor financial decision-making.

Investors will also miss the chance to get insight from Europe's top central banker after European Central Bank President Mario Draghi withdrew from the Jackson Hole conference Tuesday. Draghi had been scheduled to speak Saturday to an audience intensely interested in how European policymakers plan to turn around the eurozone's ailing economy.

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

6:00 AM Bernanke, needed, ready, still No Comments

Fed Chairman Ben Bernanke offered his views on the economy and inflation in a wide-ranging news conference.

By John W. Schoen, Senior Producer
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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Fed struggles to spur slowest recovery in memory

9:52 PM Bernanke, fed, memory, Recovery No Comments

By John W. Schoen, Senior Producer
They’ve tried dumping $2 trillion in cash into the financial system, slashed overnight interest rates to zero and made an unprecedented promise to keep rates low for at least another two years.


But as Federal Reserve Chairman Ben Bernanke and his central bank colleagues meet this week to ponder their next move, they’re still struggling to quicken the pace of the slowest economic recovery in generations.


Until recently, it appeared the Fed’s medicine was finally having the desired impact. Economic growth, as measured by gross domestic product, picked up to a healthy 3 percent annual rate in the last three months of 2011. Manufacturing, driven by a healthy pickup in new car sales, shifted into higher gear over the winter. The unemployment rate, stuck at 9.1 percent last summer, fell by a half percentage point.


But that growth may have been something of an illusion.

“It looks like a lot of the hiring that we were so enthusiastic about late last year was weather-related," said Yale economist Stephen Roach. “A little bit of a bloom is off the rose."


That view was echoed by the responses of 53 economists, fund managers, and investment strategists in the latest CNBC Fed Survey, released Tuesday. Several lackluster economic reports have moved market participants closer to the Fed’s view on the economy and the outlook for monetary policy.


The respondents downgraded their outlook for year-over-year GDP growth to 2.39 percent from 2.46 percent. They took nearly a quarter point off the outlook for growth in 2013 and now see GDP rising just 2.55 percent. As a result, they downgraded already muted expectations for the stock market, predicting the S&P 500 stock index will be basically flat through June and rise just 2.9 percent by year-end.


“Bernanke has been vindicated on the Fed's forecast, with growth now giving back some of the seasonal strength we saw earlier in the year,’’ said Diane Swonk of Mesirow Financial.


The survey echoed the belief, shared by the Fed’s own forecast, that the economy will continue to turn in a subpar performance at least through the rest of the year. Asked their opinion of Fed policy, 51 percent of respondents say it’s “just right,” up from 38 percent in March; only 36 percent believe it’s “too accommodative,” down from 53 percent in March.


Some Fed officials, including Bernanke, have recently acknowledged that the economy isn't growing rapidly enough to make a significant dent in the unemployment rate.


“If our economy were a Kentucky thoroughbred, I'd say we have moved from a walk to a trot, but we're far from a gallop," Cleveland Fed President Sandra Pianalto told a meeting of bank regulators last week in Lexington, Ky.


There are signs that sleek horse may be slowing down into a walk.


After each recession since World War II, housing has helped lead the subsequent recovery. But five years into the biggest housing bust since the Great Depression, another hoped-for spring revival in home sales is in doubt.


Following signs earlier this year that the market may have hit bottom, the National Association of Realtors said last week that sales of previously owned homes fell 2.6 percent last month to a seasonally adjusted annual rate of 4.5 million. That's well below the pace of about 6 million typically seen in a healthy economy.


"We are most certainly not set to declare that the housing recovery is over, but a strong start to the spring selling season is simply not in the data," said Dan Greenhaus, chief global strategist at BTIG in New York.


Consumer spending and retail sales perked up in first quarter, but much of the increase was fueled by rising gasoline prices. Households have had to dip into savings to spend more.


The increased spending will be hard to sustain unless employers continue to create jobs faster than the workforce expands. Some economists, including Bernanke, suspect that the burst of new hires last winter was simply a reversal of some of the steep layoffs put in place after the economy’s sharp 2008 contraction. If so, the recent job market rebound may only be temporary.


“In a weak recovery, we're going to have a really hard time getting this unemployment rate down below 8 percent,” said Roach. “If you add in the underemployment, you've still got mid-teens in terms of broad-based measures of labor market distress in the United States, which is really without precedent for a so-called peacetime expansion."


Despite the Fed’s unprecedented measures, the current expansion badly lags other recoveries. More than four years after the recession of 2007 began, the U.S. economy has barely recovered the ground lost to the steepest downturn in 50 years. This far into past recoveries, by comparison, growth had advanced by anywhere between 10 and 20 percent.


As the U.S. economy slogs along, the global economy faces renewed pressures over which Fed policymakers have little or no control.


After a period of relative stability, Europe’s financial crisis appears ready to enter another turbulent chapter. In the past few weeks, fresh concerns about Spanish banks, political upheaval in Holland, and French president Nicolas Sarkozy's narrow loss in early round voting to his Socialist rival have cast doubts on a shaky set of European reforms pieced together to avert a wider crisis. With the exception of Germany, most of Europe has lapsed back into recession.


Growth in China, following a historic economic transformation, also appears to be slowing. Though still strong by Western standards, China’s slowdown represents a further slackening of demand for goods and services sold by U.S. and European companies.


The slowdown comes amid another historic shift in demand, as consumer spending in the developing world is becoming the key source for growth an increasingly global economy.


U.S. consumption as a percentage of world GDP peaked at about 22 percent in 2002, and has declined steadily since then, according to a recent report from economists at IHS Global Insight. Two years later, consumer spending in Western Europe peaked at almost 18 percent of the global economy. The economists predict that by 2015, consumers in those two regions will account for just 26.0 percent of world GDP, down from 38.5 percent in 2002.


Growth from consumers in emerging markets like Brazil, Russia, India and China, meanwhile, is accelerating, rising to 8.1 percent of world GDP in 2010 from about 4.4 percent from 1995 through 2005. IHS Global Insight predicts the figure will hit 12.0 percent by 2015.


The shift has been accelerated by the Great Recession, the Eurozone debt debacle, and anemic growth in Europe and the United States, they said. But it’s also being propelled by strong demographic and economic forces.


“Emerging markets' consumers are now entering the world stage in greater numbers and are making a noticeable impression on multinational corporations, which view consumers in these nations as the ‘low-hanging fruit’ compared to the fatigued and frugal consumers in the developed countries," the economists said.


The April headline from the CNBC Fed Survey shows the market doesn't expect much from the Fed, but believes in the late 2014 guidance on rates. CNBC's Steve Liesman provides the details.

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Bernanke warns of threat to economy from Europe

4:16 PM Bernanke, economy, Europe, threat, warns No Comments

Federal Reserve chairman Ben Bernanke discusses his outlook on the economy, noting a sluggish labor market and increasing debt risking, producing serious economic consequences.

Yuri Gripas / Reuters

U.S. Federal Reserve Chairman Ben Bernanke arrives to testify at the House Budget committee hearing on the state of the Economy on Capitol Hill in Washington February 2, 2012.

By Martin Crutsinger, Associated Press

WASHINGTON — Ben Bernanke defended the Federal Reserve's decision to hold interest rates at record-low levels for the next three years, during a contentious hearing before federal lawmakers.

The Fed chief told the House Budget Committee Thursday that the central bank's plan is an appropriate step to combat high unemployment while inflation is stable.

Bernanke was challenged immediately on the issue by the panel's chairman, Paul Ryan, a Wisconsin Republican, who said the Fed's move would risk higher inflation and hurt growth.

"I think this policy runs the great risk of fueling asset bubbles, destabilizing prices and eventually eroding the value of the dollar," Ryan told Bernanke. "The prospect of all three is adding to uncertainty and holding our economy back."

Bernanke disagreed. He said prices have stabilized since spiking in early 2011 and the dollar has shown no signs of weakening.

The Federal Reserve chairman testified one week after the Fed signaled that a full recovery could take at least three more years. As a result, the Fed said it doesn't plan to raise its benchmark interest rate from a record low before late 2014 at the earliest.

The questions from lawmakers covered a range of topics, from Europe's debt crisis to the surging federal deficit.

Bernanke didn't stray far from remarks he made last week after the Fed's policy meeting. He said the economy has shown improvement, but that the pace has been frustratingly slow. He noted that many threats remain, including Europe's debt crisis and the nation's rising debt.

"We still have a long way to go before the labor market can be said to be operating normally," Bernanke told the committee.

Bernanke generally received praise from Democrats, while Republicans were more critical.

One member even accused Bernanke and the Fed of overstepping their authority.

Rep. Scott Garrett, a New Jersey Republican, said the Fed ventured into Congress's territory when it issued a white paper last month exploring proposals to rescue the troubled housing market. He compared the action to lawmakers approving a resolution instructing the Fed on monetary policy — the Fed's use of interest rates to try to boost or slow the economy.

"I was taken aback when the Fed issued an unsolicited white paper on housing policy and it mirrored in many ways the administration's policies on housing," Garrett, scolded Bernanke.

Bernanke apologized if Garrett felt the Fed went too far. He said that the weak housing sector was holding back overall growth and that this was of great concern for the Fed. He said the central bank did not endorse any actions but instead just explored various policy options.

"We were trying to provide pros and cons," Bernanke said.

Still, much of the morning was spent debating the Fed's policies.

Ryan criticized the Fed's decision to establish an annual inflation target of 2 percent. He said Bernanke seemed willing to accept higher inflation in order to get lower unemployment.

Bernanke said the Fed would not waiver in its efforts to maintain low inflation, believing that provided the best framework for full employment.

Rep. Diane Black said the Fed wasn't showing enough concern about the impact low interest rates were having on people who keep their money in conservative investments, such as savings accounts and CDs.

The interest on those investments hasn't kept pace with inflation.

Bernanke said the Fed was trying to get the weak economy moving and that raising interest rates could trigger a recession, which would hurt all investors.

A few questions touched on transcripts released last month that showed the Fed was slow to recognize the severity of the housing crisis in 2006. Bernanke said the Fed had learned a lot of lessons since then.

"While I can never promise that we will not have another financial crisis, I think we have made a lot of progress in how we monitor financial situations," he told the lawmakers.

Bernanke urged lawmakers to balance their desire to cut deficits with policies that could help boost the weak U.S. economy in the short run.

Earlier this week, the Congressional Budget Office estimated that the deficit will top $1 trillion for a fourth straight year and could stay around that level for years.

A key reason the deficit has surged in the past four years is that the government collected less tax revenue. In part, that's because the economy has yet to regain the millions of jobs lost during the Great Recession.

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