Bernanke offers downbeat view of economy, but no action

ByABC News
July 17, 2012, 3:44 PM

WASHINGTON -- Federal Reserve Chairman Ben Bernanke painted a somewhat darker picture of the economy Tuesday but gave no hint the central bank is poised to act within weeks to provide further stimulus.

Still, the recent signs of a weakening recovery have many economists saying the Fed is likely to move by year's end to buy more Treasury bonds in an effort to lower long-term interest rates.

Bernanke also reminded the Senate Banking Committee that the nation is at risk of slipping back into a recession if Congress doesn't reach a compromise to avoid a "fiscal cliff" — a confluence of tax increases and spending cuts that are slated to take effect at year's end that would stymie growth.

"The reduction in the unemployment rate seems likely to be frustratingly slow," Bernanke told the Senate Banking Committee in his semiannual report to Congress on monetary policy.

Bernanke added that surveys of business conditions and capital spending plans "suggest further weakness ahead." And he said warm winter weather that pulled forward construction and manufacturing activity and dampened spring sales accounts for "only part" of the recent slump in job growth.

Overall, his tone was noticeably more downbeat than last month, when he told lawmakers and reporters that he expects the economy to grow moderately this year. Since then, the government reported that employers added just 80,000 jobs in June and an average of just 75,000 a month in the second quarter, down from 225,000 in the first quarter.

Meanwhile, the Commerce Department said this week that retail sales fell in June for the third straight month — the first such streak since the depths of the recession in late 2008. And despite a better-than-expected report Tuesday on factory output in June, manufacturing activity contracted last month for the first time in three years, according to the Institute for Supply Management.

Bernanke noted the housing market is improving but added that it's contributing less to growth than it has in previous recoveries.

He reiterated that policymakers are prepared to take further steps to stimulate growth but he reminded lawmakers that the Fed took a small step toward that end last month by extending an initiative that shifts its holding from short-term to long-term bonds to reduce long-term interest rates.

He indicated policymakers are still assessing a halting economy that continues to provide mixed signals. "We are looking very carefully at the economy to (determine) whether the loss of momentum we've seen is enduring," he said.

Jim O'Sullivan, chief U.S. economist of High Frequency Economics, said Bernanke "does not seem ready" to launch another round of bond purchases at a meeting in two weeks. But he added that Bernanke's "words suggested a good chance that new stimulus will be initiated" by year's end.

Bernanke was caught in the crossfire of Democrats, who urged the Fed chairman to move quickly to goose what they said is floundering economy, and Republicans who advocated the opposite.

With Republicans in Congress unlikely to approve more government spending to create jobs, "I'm afraid the Fed is the only game in town," Sen. Chuck Schumer, D-NY, said.