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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FOMC Lowers USA 2010 GDP Projection (Review)

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Federal Reserve Building 1937

FOMC Meeting Minutes and Summary of Economic Projections

"Pace of recovery to be held back by a number of factors"

GDP Projections Lowered & Unemployment Projections Raised

The short story on the realease of the FOMC meeting minutes was the economic recovery is going to take a few years (up to 5 or 6 years).

1) 2010 GDP central tendency projection was lowered to 3.0%-3.5% from 3.2%-3.5%

2) 2010 Unemployment Rate central tendency projection was raised slightly to 9.2%-9.5% from 9.1%-9.5%

Overall, the 17 FOMC members lowered their projections via the Summary of Economic Projections, which can be interpreted as a more negative view of the USA economic recovery. Sentiment is not as positive as the previous Summary compiled in April. "FOMC participants’ forecasts for economic activity and inflation suggested that they expected the recovery to continue and inflation to remain subdued, but with, on balance, slightly weaker real activity and a bit lower inflation than in the projections they made in conjunction with the April 2010 FOMC meeting. As depicted in figure 1, the economic recovery was anticipated to be gradual, with real gross domestic product (GDP) expanding at a pace only moderately above the participants’ assessment of its longer-run sustainable growth rate and the unemployment rate slowly trending lower over the next few years."

"Overall, participants continued to expect the pace of the economic recovery to be held back by a number of factors, including household and business uncertainty, persistent weakness in real estate markets, only gradual improvement in labor market conditions, waning fiscal stimulus, and slow easing of credit conditions in the banking sector." 

FOMC Statement

The official statement and press release on June 23, 2010 by the Federal Open Market Committee was previously reviewed here with the headline summary "Economic Recovery Is Proceeding and Labor Market Is Improving Gradually".

FOMC Meeting Minutes

The FOMC meeting minutes were released July 14 and and portions of the staff summaries are below, wtih emphasis added. Overall, USA economic growth was seen as slowing as noted below "economic recovery was proceeding at a moderate pace".

Moderate Recovery

"Moderate" has been the theme for the Fed as 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".

Participants' Views of Current Conditions and the Economic Outlook

"In conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections of economic growth, the unemployment rate, and consumer price inflation for each year from 2010 through 2012 and over a longer horizon. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge over time under appropriate monetary policy and in the absence of further shocks. Participants' forecasts through 2012 and over the longer run are described in the Summary of Economic Projections, which is attached as an addendum to these minutes."

Summary of Economic Projections

Table 1. Economic projections of Federal Reserve Governors and Reserve Bank presidents, June 2010

The central tendency excludes the three highest and three lowest projections for each variable in each year.

Change in Real GDP (%)
                       "Central Tendency"          "Range"                         "Prior Central Tendancy" (April)
2010                3.0 to 3.5                         2.9 to 3.8                     3.2 to 3.7
2011                3.5 to 4.2                         2.9 to 4.5                     3.4 to 4.5
2012                3.5 to 4.5                         2.8 to 5.0                     3.5 to 4.5
Longer Run      2.5 to 2.8                         2.4 to 3.0                     2.5 to 2.8

Unemployment Rate (%)
                       "Central Tendency"          "Range"                         "Prior Central Tendency" (April)
2010                9.2 to 9.5                         9.0 to 9.9                      9.1 to 9.5
2011                8.3 to 8.7                         7.6 to 8.9                      8.1 to 8.5
2012                7.1 to 7.5                         6.8 to 7.9                      6.6 to 7.5
Longer Run      5.0 to 5.3                         5.0 to 6.3                      5.0 to 5.3

Federal Open Market Committee Meeting Minutes; June 22 & 23, 2010

<Emphasis added by italics>

Staff Review of the Economic Situation

"The information reviewed at the June 22-23 meeting suggested that the economic recovery was proceeding at a moderate pace in the second quarter. Businesses continued to increase employment and lengthen workweeks in April and May, but the unemployment rate remained elevated. Industrial production registered strong and widespread gains, and business investment in equipment and software rose rapidly. Consumer spending appeared to have moved up further in April and May. However, housing starts dropped in May, and nonresidential construction remained depressed. Falling energy prices held down headline consumer prices in April and May while core consumer prices edged up."

Staff Review of the Financial Situation"The FOMC's decision at its April meeting to maintain the 0 to 1/4 percent target range for the federal funds rate and the wording of the accompanying statement were largely in line with expectations and prompted little market reaction. Economic data releases were mixed, on balance, over the intermeeting period, but market participants were especially attentive to incoming information on the labor market--most notably, the private payroll figures in the employment report for May, which were considerably weaker than investors expected. Those data, combined with heightened concerns about the global economic outlook stemming in part from Europe's sovereign debt problems, contributed to a downward revision in the expected path of policy implied by money market futures rates."

Staff Economic Outlook

"In the economic forecast prepared for the June FOMC meeting, the staff continued to anticipate a moderate recovery in economic activity through 2011, supported by accommodative monetary policy, an attenuation of financial stress, and strengthening consumer and business confidence. While the recent data on production and spending were broadly in line with the staff's expectations, the pace of the expansion over the next year and a half was expected to be somewhat slower than previously predicted. The intensifying concerns among investors about the implications of the fiscal difficulties faced by some European countries contributed to an increase in the foreign exchange value of the dollar and a drop in equity prices, which seemed likely to damp somewhat the expansion of domestic demand. The implications of these less-favorable factors for U.S. economic activity appeared likely to be only partly offset by lower interest rates on Treasury securities, other highly rated securities, and mortgages, as well as by a lower price for crude oil. The staff still expected that the pace of economic activity through 2011 would be sufficient to reduce the existing margins of economic slack, although the anticipated decline in the unemployment rate was somewhat slower than in the previous projection."

Committee Policy Action

"In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to maintain the target range of 0 to 1/4 percent for the federal funds rate. The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside. Nonetheless, all saw the economic expansion as likely to be strong enough to continue raising resource utilization, albeit more slowly than they had previously anticipated. In addition, they saw inflation as likely to stabilize near recent low readings in coming quarters and then gradually rise toward more desirable levels. In sum, the changes to the outlook were viewed as relatively modest and as not warranting policy accommodation beyond that already in place."

FOMC Statement: June 23, 2010

Federal Open Market Committee
Release Date: June 23, 2010
For immediate release

Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.

Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.

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Corporate Earnings Season Begins! (Video)

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Second Quarter Corporate Earnings Reports Begin This Week

Corporate Earnings Season Begins This Week!

Hopefully USA corporate earnings for the second quarter will be good to very good. If so, this should help hold up the stock market that has pulled back as a result of the European sovereign debt, financial system, Euro, and economic crises plus uncertainty over the viability of the USA economic recovery. Corporate guidance, that is projections for the upcoming quarters and full year, will be under scrutiny to see if corporations are projecting any revenue slowdown or reversal due an economic slowdown in the USA, Europe, and/or globally.

Let the Games Begin!

(MarketWatch) Alcoa starts week that includes reports from Intel, Google, AMD, GE, Citi, Bank of America and Chase. Baseball takes a break for its all-star game; Congress returns from its break to deal with the Kagan nomination and bank reform. Rex Crum reports.

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