US economy still facing daunting challenges and headwinds – Bernanke

31 August 2012 17:37  [Source: ICIS news]

WASHINGTON (ICIS)--While some parts of the US economy have improved recently, Federal Reserve Board chairman Ben Bernanke on Friday warned that the nation still faces daunting economic challenges and headwinds.

In a much-anticipated speech to international banking officials at Jackson Hole, Wyoming, Bernanke reviewed actions taken by the Fed during and since the recession of 2008-2009 and said those steps, especially drastic lowering of interest rates, likely saved the US economy from a sharper downturn.

But despite some expectations, the central bank chief did not announce any new or further measures to stimulate the still wobbly US recovery.

For example, some economists had speculated that Bernanke would use this annual speech to bankers to announce a further extension of the record-low federal funds interest rate of 0%-0.25%, which the Fed has earlier said would likely be maintained until the end of 2014.

He did not offer any indication that the rock-bottom interest rate would be extended past 2014. On the contrary, Bernanke suggested that the current 2014 extension "guidance" could be shortened or withdrawn.

“This guidance,” he said, “is not an unconditional promise; rather, it is a statement about the [Fed’s] collective judgment regarding the path of policy that is likely to prove appropriate,” given the Fed’s objectives and the economic outlook.

That outlook, Bernanke said, has improved somewhat.

“Key sectors such as manufacturing, housing and international trade have strengthened,” he said, “firms’ investment in equipment and software has rebounded, and conditions in financial and credit markets have improved.”

However, he said, despite those improvements, “the economic situation  is obviously far from satisfactory”.

He said the unemployment rate, which inched up to 8.3% in July, remains unacceptably high and is not likely to improve unless the underlying economy grows more quickly than it has in the last year or more.

Consequently, he said, “the unemployment rate is likely to remain far above levels consistent with maximum employment for some time”.

In addition, he said he is worried that persistent high unemployment could cause long-term economic harm.

“Persistently high levels of unemployment will wreak structural damage on our economy that could last for many years,” he said.

Significant improvement in the US economy, he said, is being blocked by a number of headwinds.

Bernanke noted that while the long-depressed US housing sector has seen some recent improvements, “housing activity remains at low levels and is contributing much less to the recovery than would normally be expected at this stage of the cycle”.

Federal and state governments are still cutting spending and jobs, businesses and consumers are worried about the approaching “fiscal cliff” and the eurozone crisis, and bank lending terms for business and potential home buyers remain tight, he said.

Although Bernanke gave no hint of any possible further Fed moves to stimulate the economy, he did reiterate his oft-repeated assurance that “the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery ... in a context of price stability”.

That means that the Fed would not implement further stimulus measures if Bernanke and other central bank policymakers were worried that such steps could trigger runaway price inflation.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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