Gloomy Fed chief holding fire on adding more stimulus for growth
BEN Bernanke offered a gloomy outlook for the US economy yesterday but the Federal Reserve chairman offered no hint of further monetary easing in testimony to Congress.
"We are looking very carefully at the economy, trying to judge whether or not the loss of momentum we've seen recently is enduring, and whether or not the economy is likely to continue to make progress," he said, warning that progress in reducing a 8.2pc unemployment rate "seems likely to be frustratingly slow".
Bernanke told the Senate Banking Committee the US economic recovery was being held back by anxiety over Europe's debt crisis and the path of US fiscal policy.
But he stayed closely to the message of watchful waiting that the central bank's policy panel delivered in June.
"Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to economic growth, the committee made clear at its June meeting that it is prepared to take further action," Bernanke said in his testimony on the Fed's semi-annual monetary policy report.
Some investors had hoped the Fed chief would signal that the central bank was moving close to a third round of bond purchases -- or QE3 in market parlance -- to support the economy.
Prices for US stocks initially fell but clawed back into positive territory by midday, while the dollar rallied and prices for longer-dated US government debt erased losses.
The Fed has held overnight borrowing costs near zero since December 2008 and has bought $2.3trn in government and mortgage-related debt in an effort to push long-term interest rates lower.
As the recovery faltered, it has promised to hold rates at rock bottom levels until at least 2014 and extended the average maturity of bonds in its portfolio in a further effort to depress long-term borrowing costs. At its June meeting, the Fed ramped up its efforts to rebalance its portfolio.
Despite the Fed's support, the economy is growing too slowly to lower unemployment. US gross domestic product expanded at a tepid 1.9pc annual rate in the first quarter, and economists think its second quarter performance was even weaker.
With growth slowing around the globe, many other central banks have also eased policy recently, including the European Central Bank and the central banks of Britain and China.
Bernanke said Fed policymakers would consider a range of tools to further stimulate growth if it became clear the labour market was not improving or if there was a risk of a deflation.
Bernanke told lawmakers that recent deterioration in the labour market suggests the nation's 8.2pc jobless rate will come down all too gradually, admitting for the first time the softness could not be explained away by purely seasonal factors. During Q2, job creation averaged 75,000 per month, down from an average of 226,000 in the first quarter.
The Fed chief said that manipulation of the global benchmark interest rate Libor by banks and traders had undermined confidence in financial markets. The process of calculating the Libor -- in which banks submit estimates of their borrowing costs -- was "structurally flawed," but the Fed had limited authority to force changes since it was overseen by the British Bankers' Association. (Reuters)