Fed sees improvement, risk in U.S. economy

McClatchy NewspapersMarch 20, 2013 


Federal Reserve Chairman Ben Bernanke speaks during a news conference in Washington


— The Federal Reserve upped its forecast for the U.S. labor market Wednesday, but Chairman Ben Bernanke cautioned that ongoing political battles over federal spending are creating headwinds and led the central bank to revise its forecast and project slower growth.

The rate-setting Federal Open Market Committee left the Fed’s benchmark lending rate at near zero, where it’s been since December 2008. And the committee kept in place controversial purchases of mortgage bonds and treasury bonds to spur the economy, at a monthly pace of $40 billion and $45 billion, respectively.

Ahead of Bernanke’s news conference, the Fed released revised economic projections from 19 Fed governors and district bank presidents. These 19 experts slightly downgraded growth forecasts for 2013, to within a range of 2 percent to 3 percent this year. That’s down from a forecast ranging from 2 percent to 3.2 percent in December’s forecast.

However, the employment outlook improved, with the Fed’s experts seeing the jobless rate in a range at year’s end between 6.9 percent and 7.6 percent. That’s vs. the range of 6.9 percent to 7.8 percent offered in December. In the government’s latest unemployment reading, for February, the rate improved by two-tenths of a percentage point to 7.7 percent.

Addressing reporters, Bernanke said that since December’s forecast the economy has seen a return “to modest economic growth following a pause late last year.” He cautioned that it was too soon to know if this is lasting and warned that the ongoing budget battles in Washington that sliced $85 billion out of federal spending in the current fiscal year “may slow economic growth and job creation later this year.”

Several economic indicators have improved markedly in recent months, especially employment and lower first-time jobless claims. The Dow Jones industrial average this month hit all-time highs – albeit not inflation-adjusted records. The improving economy has led many on Wall Street to speculate on when the Fed might back off its controversial and unorthodox efforts to stimulate the economy.

Bernanke made it clear that day is not near, anticipating questions on the matter and saying in his prepared remarks that “at this meeting the committee judged that no adjustment was warranted.”

Peppered on this during a wide-ranging question-and-answer session, he acknowledged that markets are correct to ask for numerical targets on future purchases of mortgage bonds and government debt. This would help markets better anticipate how the Fed views the economy. But Bernanke said it’s difficult to provide such information, because the controversial efforts called quantitative easing have never been done before on this scale and there is no consensus among Fed members.

The Fed chief fielded several questions on efforts to either break up large banks or restructure regulation to ensure their failure won’t threaten the U.S. economy. Bernanke clashed with new Massachusetts Democratic Sen. Elizabeth Warren on the issue earlier this month, and he clarified that he agrees with the senator that the largest banks still pose a risk.

“It’s not just something you can forget about,” he said, acknowledging the Fed is preparing surcharges for the biggest banks and other steps that will require they set aside more capital to guard against downturns in the future.

On other matters, Bernanke acknowledged that overly tight lending requirements by banks have stifled mortgage lending, noting that “our sense is that it has gone too far.” On fears that a bank crisis in Cyprus could become a global problem, the Fed chief acknowledged Cyprus is in a “difficult situation,” but he said he didn’t think it threatened U.S. markets. On assertions that U.S. stock price gains amount to a bubble, Bernanke said that “we don’t see anything out of line with historical patterns.”

Bernanke acknowledged that he’d spoken with President Barack Obama since December about his future but warned that should he not be reappointed it wouldn’t threaten the removal of unorthodox policies now being deployed by the Fed.

“I don’t think I’m the only person in the world who can manage the exit,” he said.

Email: khall@mcclatchydc.com; Twitter: @KevinGHall

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