WASHINGTON — The U.S. economy is likely to keep growing, albeit at a subpar pace because of continuing head winds, Federal Reserve Chairman Ben Bernanke said Friday in a much-anticipated speech that failed to spell out what steps he's considering next to boost the economy.
Most economic analysts had expected Bernanke to discuss his possible options to aid the economy, but instead they got a pep talk and an announcement that the Sept. 20 meeting of the Fed had been extended to a two-day session.
That's significant, because the Fed issued an unusual statement on Aug. 9 pledging to keep its benchmark lending rate near zero until at least the middle of 2013. That statement had three dissenting votes, something unheard-of in recent memory, which suggested that there's no consensus yet on next steps.
Bernanke is sometimes called "Helicopter Ben" because in a 2002 speech before he became the chairman, he said the Fed could helicopter in money to prevent deflation, the debilitating collapse of prices across the economy. There was a threat of that last August, when he announced a controversial program to have the Fed purchase $600 billion of U.S. government bonds to bring down lending rates and spur investment in stocks, bonds and commodities.
On Friday, Bernanke offered no such talk.
"The helicopter is parked but still available. He didn't take it away, but he didn't indicate anything new," said Kathy Jones, the head of fixed income strategy for the Charles Schwab brokerage firm.
"He used the word 'inflation' seven times. He didn't make any mention of deflation. In the heart of the crisis ... deflation was the big risk."
Bernanke spent a good part of his speech at the Wyoming resort town of Jackson Hole outlining why he didn't think the difficult four years that Americans have suffered through will morph into a permanently different economic landscape. He looked past a revision Friday of second-quarter growth estimates, which the federal Bureau of Economic Analysis now says was just 1 percent rather than the 1.3 percent estimated on July 29.
"It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals," Bernanke said, suggesting that he's done his part but politicians must do more.
He said U.S. policymakers faced two major challenges in the meantime: helping the economy "further recover" from the recession and doing so in ways that promote longer-term growth.
While the deficit is a problem, the Fed chief said, it should be addressed over a long time horizon and lawmakers shouldn't cut government programs immediately, which could create even more drag against the economic recovery.
"Acting now to put in place a credible plan for reducing future deficits over the longer term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives," Bernanke said.
The Fed chief was blunt about the economic harm caused by the political theater in Congress over raising the debt ceiling.
"The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses," he said.
"Although details would have to be negotiated, fiscal policymakers could consider developing a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals."
Financial markets swooned after the Bernanke speech at 10 a.m. Eastern time. The Dow Jones industrial average fell by as much as 220 points, but sentiment swung as the speech sank in and the Dow roared back into positive territory, up by more than 150 points in midday trading. It closed up 134.72 points, or 1.2 percent, at 11,284.54.
By not giving in to financial market hopes of more support, Bernanke may have won some additional credibility, suggested Dean Croushore, a former Fed economist who's the chairman of the economics department at the University of Richmond in Virginia.
"They're not going to jump into some action because the market got spooked by the debt-ceiling debate. This is what the Fed should do, and if people are nervous they should say, 'I think the long-run prospects are fine,' " Croushore said, highlighting exactly what the Fed chief did.
"Slow growth is to be expected, and we don't want to panic in terms of things that are not well thought out."
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