Bernanke offers downbeat view of economy, but no action

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.

Sen. Bob Corker, R-Tenn., urged Bernanke to take no action in a bid to prod Congress to take what he described as a more sustainable step to bolster the economy — cutting the deficit. "I wish we had a chairman of the Federal Reserve saying, 'We're not going to do anything else,'" Corker said.

Bernanke shot back: "I don't think that's my responsibility." He added that the Fed's job is to keep employment high and inflation low, "not to hold threats over Congress' head."

He reiterated his view that Congress should take steps to stimulate economic growth in the near term but quickly formulate a plan to shave the $15 trillion national debt over the long term. "The timing should be adjusted to allow the recovery little bit of space to continue," he said.

"The most effective way that the Congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run stability and the fragility of the recovery," Bernanke said. "Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence."

If a series of tax hikes and spending cuts all kick in at year's end, "a shallow recession would occur early next year" and 1.2 million fewer jobs would be created, Bernanke said, quoting the Congressional Budget Office.

Along with the fiscal cliff, Bernanke cited the European debt crisis as another major risk to the economy, despite recent actions by continent leaders to ease worries.

He said the crisis could hang over the U.S. economy for some time as key developments are likely to remain unresolved into next year. "We appear to be in a muddling through type of environment," Bernanke said.

With U.S. fiscal issues also likely to be unsettled until late this year, some analysts say the economy may not emerge from a third straight spring slump as easily as it did the past two years. "This year the slowdown may be more protracted," Steven Ricchiuto, chief economist of Mizuho Securities said in a research note.