The Federal Reserve's raft of new stimulus
measures were needed amid "grave concern" over US joblessness and the
struggling economy, but the central bank's tools were not a panacea
for the economy, Ben Bernanke, head of the US central bank, said
Thursday.
Bernanke spoke to reporters for 50 minutes after the Fed
announced a new open-ended programme to buy mortgage securities and
provide other infusions to the economy.
Looking at the "fiscal cliff" that looms if the gridlocked
Congress cannot agree on taxes and spending, Bernanke warned that the
bank would have limited ability to bail out the country in that
event. His remarks were an indirect admonishment to Congress that it
needed to resolve its standoff and set the stage for improved
economic growth.
"If the fiscal cliff isn't addressed, I don't think our tools are
strong enough to offset the effects of a major fiscal shock,"
Bernanke said.
Last month, the nonpartisan Congressional Budget Office warned
that the United States was heading for recession by early 2013 if
politicians fail to avert the looming budget cuts and tax increases
now contained in a bridging agreement.
A decision on that deal will likely be postponed for another six
months, but Bernanke warned that the longer the decision is
postponed, the more uncertainty prevails over business investment
decisions.
He said that reserve bank officials who met Wednesday and Thursday
had "considerable discussion" about the uncertainty, "including
policy uncertainty, fiscal policy uncertainty, and the implications
of that for hiring and investment decisions."
Bernanke said a lot of firms are waiting to see whether the fiscal
problem will be resolved, further restricting economic and jobs
growth.
The Federal Reserve lowered its growth expectations for 2012, to
1.7 to 2 per cent, down from the projected 1.9 to 2.3 per cent in
June. But it raised its maximum expectations for growth in 2013 to 3
per cent, up from the previous 2.8 per cent, and boosted projections
for 2014 to a possible high of 3.8 per cent.
Unemployment, now at 8.1 per cent, has not dropped below 8 per
cent since 2009, and the Fed projected that would continue for the
rest of 2012. It does not anticipate a return to more normal levels
of under 6.8 per cent until late 2015.
"As the skills of the long-term unemployed atrophy, as their
connections to the labour market wither, they may find it
increasingly difficult to get good jobs," Bernanke said.
Given the weak economic situation, the Federal Reserve said it
would expand its holdings of long-term securities by buying up an
additional 40 billion dollars a month of mortgage-backed securities
for an indefinite period, bringing to about 85 billion dollars the
amount of longer-term securities added to the Fed's balance sheet
every month.
The new programme, called QE3, is the third round of quantitative
easing by the Federal Reserve since 2008, when the US was dipping
into recession.
The bank also projected that it would keep its interest rates at
0.00 to 0.25 per cent through to 2015. Previously, 2014 had been the
target date to end the lower interest rates.
The Fed's decision was greeted by Democratic Senator Charles E
Schumer, a member of the Senate banking committee, who said: "The Fed
is fulfilling its obligation to take action to address unemployment.
Now congressional Republicans need to fulfill theirs."
Republican presidential candidate Mitt Romney's campaign charged
that a third round of easing showed "that President (Barack) Obama's
policies have not worked."
"We should be creating wealth, not printing dollars," said Lanhee
Chen, a member of Romney's campaign staff.
The stagnate economy and high unemployment are major factors in
the November 6 presidential election. Obama argues that he has
brought the country out of recession and saved the country from an
even worse economic fate through his stimulus measures and rescue of
the automobile industry.
Bernanke dismissed the suggestion that the stimulus decision was
politically motivated, saying the Fed's decisions were "based
entirely on the state of the economy."
Bernanke indicated that the Fed would keep the expansive measures
in place "for a considerable time after the economic recovery
strengthens" and the labour market has improved.
In the past, the bank set end times for its QE1 and QE2
programmes, and the open-ended nature of the Fed's decisions on
Thursday appeared to be an unprecedented step.
The Fed has kept its benchmark interest rate near zero for nearly
four years. Fed decision makers have since extended their monetary
policy by announcing large purchases of government bonds - meant to
force investors to put more resources into the private sector.
