Tags: US | Bernanke

Investors Look to Fed’s Bernanke to Keep Recovery Alive

Wednesday, 21 Jul 2010 09:46 AM

 

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Federal Reserve Chairman Ben Bernanke heads to Congress Wednesday with a message of reassurance: The Fed stands ready to take new steps to bolster the recovery if the economy worsens.

The Fed chief kicks off back-to-back appearances on Capitol Hill at a delicate time for the economy. The recovery, which had been flashing signs of strengthening earlier this year, is losing momentum. And fears are growing that it could stall.

Consumer 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.

Bernanke, who is scheduled to deliver his twice-a-year economic report to the Senate Banking Committee on Wednesday afternoon, will probably again downplay the odds that the economy will slide back into a double-dip recession. But at the same time, he'll strike a more cautious tone, pointing out that the fragile economy is still vulnerable to shocks.

To strengthen the economy, the Fed is likely to hold a key bank lending rate at a record low near zero well into 2011, or possibly into 2012, economists predict. That would mean rates on certain credit cards, home equity loans, some adjustable-rate mortgages and other consumer loans would stay at their lowest point in decades.

Ultra-low lending rates, however, haven't done much lately to rev up the economy. Consumers and businesses are cautious and aren't showing an appetite to spend as lavishly as they usually do in the early stages of economic recoveries.

Even though the prospects of deflation — a widespread and prolonged drop in prices for goods, the value of stocks and homes and in wages — is remote, some Fed officials are worried about it. Keeping rates low would help prevent deflationary forces from taking hold.

Against such a backdrop, Fed officials at their June meeting cut their forecasts for growth this year. They also saw the need to explore new options for energizing the rebound. That's a turnaround from earlier this year when they were moving to wind down crisis-era supports.

If the recovery were to deteriorate, the Fed could revive programs to buy mortgage securities or government debt. It could lower the interest rate paid to banks on money left at the Fed or cut 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.

The economic hurdles to taking such steps would be high, analysts say. There's also unease within the Fed about taking additional stimulative steps because of fear they could spur inflation or speculative excesses by investors later on.

Bernanke will be under more pressure than usual because it's an election year. Upset by high unemployment, rising foreclosures and lackluster wage gains, voters may seek to punish incumbent Democrats and Republicans in Congress if the economy doesn't get better. The unemployment rate, now at 9.5 percent, is expected to stay high — in the 9 percent range — through the end of this year, under the Fed's forecast.

Despite the wobbly recovery, there's little appetite in Congress to enact a major new stimulus package. Senate Republicans in particular have balked at spending more when the government is already saddled with record high budget deficits.

Bernanke appears before the House Financial Services Committee on Thursday.

When Bernanke delivered his economic report to Congress in February, he struck a confident note that the rebound would endure. But he warned it would not be robust enough to quickly lower unemployment. At the same time, he was laying the groundwork for the Fed to start boosting rates once the recovery was firmly entrenched.

Now, given rising threats to the rebound, prospects of a rate increase this year have disappeared, and the Fed is more focused on keeping the recovery alive.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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