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Bernanke projects modest economic growth this year

February 29, 2012|By Don Lee

Reporting from Washington —

Despite the pickup in the U.S. economy since last summer, growth is likely to be "modest" during the coming year, the Federal Reserve said Wednesday, citing factors including tight credit for businesses and consumers, the long-depressed housing market and budget-strapped governments.

Fed Chairman Ben S. Bernanke, in presenting the central bank’s semiannual report on monetary policy and the economy to Congress, did not view the recent jump in oil prices as a major impediment, though he noted that higher energy costs could pinch consumer spending. He said the spike in oil was likely to be temporary and that inflation over the long haul would likely remain subdued, presumably at or below the Fed's 2% target.

But Bernanke told lawmakers in the House Financial Services Committee the "fundamentals that support spending continue to be weak" and the recent big drop in the unemployment rate – from 9.1% in August to 8.3% in January – seemed to be somewhat out of sync with the moderate pace of economic growth.

"Continued improvement in the job market is likely to require stronger growth in final demand and production," Bernanke said in his prepared remarks. He noted Fed policymakers did not expect "further substantial declines" in the jobless rate over the course of this year.

Stocks dropped and fell into negative territory after Bernanke's presentation, after opening moderately higher upon the Commerce Department's release of a report that fourth-quarter economic growth was slightly stronger than previously thought.

Bernanke appeared at a congressional budget hearing last month, and questioning from lawmakers quickly turned into partisan wrangling over the nation’s deficits and the dual mandate of the Federal Reserve to maintain price stability and maximize employment.

At the start of the hearing Wednesday, lawmakers latched on to the same issues. In his opening remarks, the House Financial Services Committee chairman, Rep. Spencer Bachus (R-Ala.), questioned whether Congress should consider changing the Fed’s mandate so it focused on controlling inflation. Republican lawmakers have criticized Bernanke for continuing to try to stimulate the economy with bond purchases and other steps to drive down interest rates, arguing the Fed’s easy money policies pose inflation risks down the road and have debased the dollar.

Bernanke, anticipating further criticisms on this matter, said in his prepared remarks that the dual objectives of price stability and maximizing employment are "generally complementary," and in cases in which they are not, the Fed would take a "balanced approach in promoting them."

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