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WASHINGTON -- Federal Reserve chairman Ben Bernanke says the U.S. economic outlook is unusually difficult to predict, but not dire enough to warrant a shift in policy, dashing the hopes of investors who fear the recovery will peter out without a fresh jolt of stimulus.
Visiting Capitol Hill to deliver semi-annual testimony on monetary policy Wednesday, Mr. Bernanke defended his approach to nursing the world's largest economy back to health, which remains tilted toward unwinding the extraordinary measures the Fed deployed to reverse the financial crisis.
Mr. Bernanke stuck to his present course even though he said the rebound is only "moderate" and the "economic outlook remains unusually uncertain."
Stock markets in the U.S. and Canada slipped as Mr. Bernanke testified because some investors were hopeful the Fed chief would either signal more confidence in the economy or take a more aggressive stand against signs the rebound is flagging. Housing starts fell in June, according to government figures released Tuesday, flaming fears the economy could fall back into recession.
"We don't think a double dip is a high probability event," Mr. Bernanke told the Senate banking committee Wednesday. He also played down fears over a protracted collapse in prices, saying that "at this point, there is not a very high probability that deflation will become a concern."
But that's not to suggest that Mr. Bernanke is enthusiastic about the state of the economy. Just last week, the Fed cut its 2010 growth outlook to a range of 3 per cent to 3.5 per cent, from 3.2 per cent to 3.7 per cent in April.
The cutback was made because of the market turmoil related to Europe's debt crisis.
In his report to Congress, he said he is concerned about long-term unemployment and the difficulty small businesses are having obtaining credit. The average 100,000 jobs per month the economy created over the first half of the year is "insufficient to reduce the unemployment rate materially," Mr. Bernanke said. The housing market remains weak because so many vacated and foreclosed homes are weighing on prices, he added.
Since underpinning employment is part of the Fed's mandate, the uncertain economic outlook means U.S. policy makers likely will leave their benchmark lending rate near zero for a while - perhaps until well into 2011, according to Paul Ferley, an economist at Royal Bank of Canada.
In the meantime, the Fed appears to be leaning toward paring the $2-trillion (U.S.) in financial assets it absorbed during the crisis when private buyers disappeared. But only leaning. Mr. Bernanke stressed that he is prepared to explore unconventional policy again if his current projections turn out to be too optimistic.
"Even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain," Mr. Bernanke said in his prepared testimony. "We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability."
Mr. Bernanke was open in discussing what those extraordinary measures might be. He told senators that the Fed could make more explicit its promise to leave interest rates low for an extended period, or that the central bank could cut the 0.25 per cent it pays on money commercial banks deposit at the Federal Reserve. Mr. Bernanke said the Fed might also return to asset markets, buying securities in a bid to lower prevailing interest rates.
Still, his prepared remarks went into far more detail about the Fed's plans to get the size of its balance sheet closer to the $800-billion in assets it was holding before the crisis.
That's not the emphasis some analysts were looking for.
"Why the Fed finds it prudent to emphasize its ability to renormalize monetary policy when the output gap closes is beyond me," Sherry Cooper, chief economist at BMO Nesbitt Burns Inc., said in a note to clients. "Deflation, not inflation, will be more troubling for the foreseeable future."
KEVIN CARMICHAEL
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