Bernanke gives sunny view of U.S. economic recovery

McClatchy NewspapersFebruary 3, 2011 

WASHINGTON — Federal Reserve Chairman Ben Bernanke pointed Thursday to "increased evidence" of a self-sustaining economic recovery and strongly rejected suggestions that his policies were driving up global food prices and destabilizing Egypt and other emerging markets.

The Fed chairman was unusually upbeat on the U.S. economy's outlook, noting in a speech at the National Press Club that "we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold."

Pointing to new data from last week showing that households boosted their spending by an annual rate of 4 percent in the final three months of 2010, Bernanke added that "the recent gains in consumer spending look to have been reasonably broad based."

The stock market this week also reached levels not seen in more than two years. The Dow Jones Industrial Average closed above 12000 Tuesday for the first time since June 2008.

Consumption drives about two-thirds of U.S. activity, so anything that points to consumers picking up their spending is a hopeful sign. Employers have been waiting for firm and consistent signs of increased consumption before boosting their hiring, and monthly employment numbers are slowly improving.

He took care to repeat points he's made in the past, that inflation is well contained and that it'll take quite some time for the unemployment rate to fall sharply.

"Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," Bernanke cautioned, a day before a much anticipated government jobs report for January.

After his speech, Bernanke then took the rare step for him of answering questions from reporters. His predecessors all shied from the media.

He was pressed on whether the Fed's ongoing purchase of $600 billion in Treasury bonds_ a process called quantitative easing — has had the unintended consequence of raising food costs around the world, and perhaps contributing to the unrest in Egypt and elsewhere in North Africa and the Middle East.

"I'm not sure I accept the premise," Bernanke said, noting that weather-related constraints on food supplies may be a factor, as well as growth in demand for food in countries such as Egypt.

Bernanke called it "unfair" to blame quantitative easing, which is designed to boost the price of stocks and other assets and thwart any chance of deflation _ the fall in prices across the economy. He suggested that emerging markets themselves are partly to blame, since they can adjust the value of their currency against the U.S. dollar or take other protective steps.

"So it's really up to emerging markets to find the appropriate tools to balance their own growth," he said, adding that their "continued growth will continue to put pressure on the prices of commodities and food around the world."

Bernanke may have inadvertently stirred a hornet's nest. He went on to say that the currency in Egypt and elsewhere strengthened against the dollar because of the Fed policy, meaning that these economies have more purchasing power in transactions conducted in U.S. dollars.

That ignores, however, a trend in recent years where the price of oil and other commodities generally move in the opposite direction of the dollar. When the dollar falls in value, commodity prices have gone up.

Seeming to sink his own argument, Bernanke confirmed in the question-and-answer session that quantitative easing has driven up the value of stocks and other assets by driving down returns for investors in safe bets such as long-term bonds, thus prodding them to take more risks.

"Are there other reasons for prices going up? Absolutely. But to say 'we had nothing to do with prices going up' is not acknowledging the facts of what is going on," said Phil Flynn, senior market analyst for commodities trader PFG Best in Chicago.

Still, Bernanke pronounced quantitative easing a success.

"We're moving in the right direction," the Fed chairman said, dodging the question of whether the Fed will continue with quantitative easing after July 1, when the Fed will have purchased $600 billion in bonds.

Bernanke said he didn't think investors are overly worried now about high U.S. budget deficits and debt, but he suggested that Congress shouldn't wait for that day to come before acting to curb the debt. He was more concerned about brinksmanship from conservatives and Tea Party lawmakers threatening not to raise the nation's debt ceiling — which will be reached perhaps as soon as the end of March — potentially leaving the nation unable to pay its creditors.

"This is a very serious matter," Bernanke said, warning that "the implications of that for our financial system or our economy would catastrophic."

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