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Bernanke’s Bleak Assessment Could Presage Future Fed Action

Jul 19, 2012

This is an excerpt from Executive Insight Briefing, produced every Thursday by the National Journal’s Daily Briefings Team.

What’s the Fed’s next move? That’s the question on many lips in Washington lately, but it was one left mostly unanswered as Federal Reserve Chairman Ben Bernanke made bleak economic assessments but offered no prescriptions in two appearances before Congress this week.

In an appearance before the Senate Banking Committee, Bernanke said the Fed was “prepared to take future action”  to stimulate the stalled economy, saying one of the keys would be “whether or not there is in fact a sustained recovery going on in the labor market or are we stuck in the mud.”

Democrats, especially President Obama, are running out of time on the economy – unemployment remains above 8 percent, and while action by the Fed could help, it might not have much effect on the economy, if at all, until after Election Day. Or as Princeton economist Alan Blinder told NPR recently, the problem with the Fed is “they don't have any heavy artillery left. They used the heavy artillery long ago. Then they used the rifles. And now, they're down to bows and arrows and rocks and things like that.”

Last month, the Fed decided to renew a program known as “Operation Twist,” which was aimed at driving down long-term interest rates, but even that action was seen by many like Blinder as weak tea.

Though Bernanke offered some positives, his appearances this week were less than reassuring. He noted weakness in manufacturing – which had been a strong point until lately – and added that any reduction in the unemployment rate “will remain frustratingly slow” over the near term. Many expect the Fed  will engage in a third round of long-term bond purchasing – known as quantitative easing – to help spur the economy, but Bernanke offered no insight on that front.

Bernanke warned of the impending “fiscal cliff” coming at the end of the year, reiterating earlier concerns that current economic policies are on an “unsustainable path.” He said failure to act ahead of the cliff would put the economy in a “shallow recession” next year.

Bernanke also faced questions over the growing rate-fixing scandal over the London interbank offered rate, or Libor for short. Reports last week revealed that the Fed Board of Governors was notified of potential rate-rigging back in 2008. Under questioning on Tuesday, Bernanke said that “the appropriate authorities had the information” on rate-rigging concerns. But the governor of the Bank of England said this week that then-New York Fed President Timothy Geithner did not offer any such warning, only making suggestions on reforming the rate.

Read the complete July 19, 2012, edition of Executive Insight Briefing.

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