Bernanke Offers No Hint Fed Is Planning Further Easing
Federal Reserve Chairman Ben Bernanke offered no new hints Tuesday that the central bank is planning more easing, but he repeated his pledge that the Fed “is prepared to take further action as appropriate to promote a stronger economic recovery.”
In prepared testimony before the Senate Banking Committee, Bernanke said economic uncertainty is increasing, mainly due to the European debt crisis and the looming “Fiscal Cliff” in the U.S.
“Risks to economic growth have increased,” he said, and “Europe’s financial markets and economy remain under significant stress.”
“Reduction in unemployment is likely to be frustratingly slow,” Bernanke said, but he said there were “modest signs of improvement in housing.”
Stocksquickly dropped after Bernanke's initial remarks, but turned slightly higher when he responded to the committee's questions about how to improve unemployment levels.
"The Fed stands ready to do more asset purchases when needed," he said. "Any actions would likely involve the [Fed's] balance sheet."
After these remarks, the Dow Jones Industrial Average , the S&P 500 , and the Nasdaq edged higher in choppy trading.
Investors had hoped Bernanke would signal another round of bond purchases, meant to push down long-term interest rates and encourage more borrowing and spending. The first two rounds of the Fed's bond purchases had triggered powerful rallies in the U.S. stock market.
Bernanke's testimony comes asjob growth has slumped and consumers have grown more cautious about spending. On a positive note, homebuilder sentiment has risen to a 5-year high.
Bernanke acknowledged these developments noting that the economy, after growing at an annual rate of 2.5 percent in the second half of 2011, slowed to roughly 2 percent in the first three months of this year — and likely slowed further in the April-June period.
This slow economic growth prompted Senator Charles Schumer (D-NY) to grill Bernanke on the looming "fiscal cliff" — when a host of tax cuts expire and automatic spending cuts are set to kick in at the end of the year.
Schumer said Congress was powerless to reverse the economic slowdown — and mitigate the fiscal cliff — but that the Federal Reserve should work to do so.
"The Fed is the only game in town," said Schumer before adding, "Get to work Mr. Chairman."
While Bernanke did not engage futher in debate with Schumer, he did directly address the interest rate fixing scandalfacing banks and regulators.
There was, he said, a "substantial response" by the New York Fed to inform appropriate authorities about European banks' susceptibilty to submit false rates — in an attempt to manipulate the London InterBank Offered Rate (LIBOR).
Bernanke also called Libor's interest rate-setting system "structurally flawed," and that it is "undermining confidence in markets." He did not, however, answer why the Fed did not make its recommendations to authorities more public back in 2008.
Apart from Tuesday's testimony, minutes of the June meeting show that Fed officials were open to taking further action — but were divided over whether the economy needs help now.
Since then, the government has reported that job growth slowed sharply in the April-June quarter — to 75,000 a month from 226,000 a month from January through March. The unemployment rate stayed at 8.2 percent last month.
Bernanke will give testimony again on Wednesday to the House Financial Services Committee.
The Associated Press contributed to this report.