Fed Chair Bernanke: Moderate Recovery, Outlook "Unusually Uncertain" (Review)

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USA Capitol Building

USA Economic Expansion Proceeding at Moderate Pace
Economic Outlook Remains "Unusually Uncertain"

Chairman Ben S. Bernanke: Semiannual Monetary Policy Report to the Congress

Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C., July 21, 2010

(Chairman Bernanke presented identical remarks before the Committee on Financial Services, U.S. House of Representatives, on July 22, 2010)

Overview

Although Chairman Bernanke's testimony was not considered bullish by the markets, which dipped, on Wednesday, July 21, the markets have moved on and rallied subsequently. His first statement sums up the official view of both the Federal Open Market Committee and Board of Governors of the Federal Reserve System: "The economic expansion that began in the middle of last year is proceeding at a moderate pace, supported by stimulative monetary and fiscal policies." No change here, as discussed below.

The statement in the Federal Reserve Policy section that the media picked up and the markets noticed was in the Federal Reserve Policy section (below), "Of course, 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." This gives the appearance Chairman Bernanke, the Board of Governors of the Federal Reserve System, and the Federal Open Market Committee are hedging their bets, so to speak, and recognizing risk, uncertainty  in the USA economic recovery.

Mr. Bernanke notes in the consumer sector that retail spending is up, the housing market is weak, and a drag on consumer spending is the slow recovery in the labor market. In the business sector, capital expenditures are up along with imports and exports. Inflation is low.

 

FOMC

Chairman Bernanke cited the Federal Open Market Committee (latest meeting minutes reviewed here), "expect continued moderate growth, a gradual decline in the unemployment rate, and subdued inflation over the next several years." He also reiterated the FOMC GDP projections, from June, for 2010, of +3.0% to +3.5%, which was lowered from +3.2% to +3.7% in April. He noted the FOMC "the Committee’s somewhat weaker outlook is that financial conditions - though much improved since the depth of the financial crisis - have become less supportive of economic growth in recent months." He cited the EU sovereign debt and related financial system crisis as the primary cause.

USA: Moderate Recovery, Moderate Growth

"Moderate" has been the theme for the Fed. Now in this testimony, the Semiannual Monetary Policy Report to Congress, Chairman Bernanke states, "The economic expansion that began in the middle of last year is proceeding at a moderate pace, supported by stimulative monetary and fiscal policies." The FOMC meeting minutes from June 23 continued the moderate viewpoint but did say: "pace of the economic recovery to be held back by a number of factors", which perhaps implies moderate at best. The FOMC noted "the pace of economic recovery is likely to be moderate for a time" in the FOMC Statement on June 23. The Fed Beige Book on June 9 noted continued, modest improvement of economic activity and conditions in the last 8 weeks. Chairman Ben Bernanke, also on June 9, stated to the House Committee on the Budget "the recovery in economic activity that began in the second half of last year has continued at a moderate pace so far this year".

Federal Reserve Policy
Chairman Bernanke recaps the measures taken during the USA financial and economic crisis, noting the very low federal funds rate as one of the actions taken and that the rate would be low for an "extended period". In this section, Mr. Bernanke made a statement that caught the media's attention: Of course, 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."

Financial System

Bernanke stated, "the state of the U.S. banking system has also improved significantly since the worst of the crisis" but "bank loans outstanding have continued to contract."

Financial Reform Legislation

Chairman Bernanke supports by stating, "That legislation represents significant progress toward reducing the likelihood of future financial crises and strengthening the capacity of financial regulators to respond to risks that may emerge."

Monetary Policy Report to the Congress

The Part 1, Overview, Monetary Policy and the Economic Outlook

The USA GDP

After rising at an annual rate of about 4 percent, on average, in the second half of 2009, U.S. real GDP increased at a rate of 2¾ percent in the first quarter of 2010, and available information points to another moderate gain in the second quarter. Some of the impetus to the continued recovery in economic activity during the first half of the year came from inventory investment as businesses started to rebuild stocks after the massive liquidation in the latter part of 2008 and in 2009. In addition, final sales continued to firm as personal consumption expenditures (PCE) rose and as business fixed investment was spurred by capital outlays that had been deferred during the downturn and by the need of many businesses to replace aging equipment. In the external sector, exports continued to rebound, providing impetus to domestic production, while imports were lifted by the recovery in domestic demand. On the less favorable side, outlays for nonresidential construction have declined further this year, and despite a transitory boost from the homebuyer tax credit, housing construction has continued to be weighed down by weak demand, a large inventory of distressed or vacant houses, and tight credit conditions for builders and some potential buyers. In addition, state and local governments are still cutting spending in response to ongoing fiscal pressures.

Links
Chairman Ben S. Bernanke: Semiannual Monetary Policy Report to the Congress (Federal Reserve Board)
Semiannual Monetary Policy Report (Federal Reserve Board)


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