Ben Bernanke: No policy shift unless economy sags

(MoneyWatch) Federal Reserve Chairman Ben Bernanke indicated today that the risks to the U.S. economy have increased and that the central bank is prepared to take action if conditions deteriorate further. Yet he offered no sign in his testimony before the Congressional Joint Economic Committee that the Fed is prepared to change course at its next monetary policy meeting later this month.

Expectations that the Fed might ease policy were raised this week when three regional bank presidents -- John Williams of San Francisco, Dennis Lockhart of Atlanta, and Eric Rosengren of Boston -- all hinted at a willingness to consider further monetary easing in a bid to boost economic growth. Remarks by Fed governor Janet Yellen also encouraged speculation that Bernanke might hint that the Fed was ready to change in policy.

Bernanke signals no imminent steps to aid economy
Bernanke likely to be pressed on health of economy
Will the weak jobs report prompt action from policymakers

But with Bernanke's testimony, expectations that the Fed will alter its stance anytime soon have been all but eliminated. Instead, the Fed will stay in "wait and see" mode on the belief that its policy stance is already highly accommodative. Further easing is only called for if the economy begins to show signs of weakening further or turns downward. The Fed's greatest fear is deflation, and any sign that inflationary expectations are plunging would likely spur a change in policy.

For now, the central bank believes it has done enough. By contrast, many economists outside the Fed are urging immediate action to help the recovery along and to ensure against future problems related to Europe's ongoing debt crisis or a from a spike in oil prices. There is lag between the time the Fed alters policy and when the change affects the economy, and a wait-and-see approach is risky in that it can cause the Fed to end up behind the curve. Nevertheless, the Fed feels the risks of acting now, in particular the risk of inflation, trump fears about present and future economic growth.

Bernanke also discussed fiscal policy in his testimony, urging lawmakers to put the budget deficit on a long-run sustainable path without "unnecessarily impeding the current economic recovery." He cited the "fiscal cliff" -- the scheduled expiration of tax cuts and a planned reduction in government spending on Jan. 1 of next year -- as an immediate concern, and he is clearly worried about the impact on the economy if there is a large reduction in the federal deficit while the economy is still struggling to recover.

Bernanke indicated that the Fed would appreciate help from lawmakers in the short-run in speeding the recovery, previously mentioning the need for increased infrastructure spending. Like most mainstream economists, he is calling for more fiscal stimulus in the short-run, or at least no reduction in what is already being done, and a plan for a sustainable long-run budget. Whether Congress can deliver or not is an open question. Stimulus in the near term is a long shot given the political gridlock in Congress, and the ability of lawmakers to solve the long-run problem also adds a high degree of uncertainty.

But however the budget negotiations turn out, as Bernanke notes it will have consequences for monetary policy, and the Fed would feel more confident in its own abilities if it had more support from Congress.

Overall, the main message from Bernanke's testimony is that the Fed is aware that the risks to the economic outlook have increased. But the bank is not yet convinced that current troubles are anything more than a bump in the road, and its worries about the future are not enough to motivate action.

That may change if conditions deteriorate -- we will have to "wait and see" -- but for now present policy will continue.

[sjc_1]

He is waiting on QE3 depending on what happens in Spain. Fed is monetary policy, that is just one tool that can not directly affect jobs. The money supply and interest rates are indirect tools in a non managed so called economy.

[truthskr17]

What a puff piece! The Fed is waiting to create more money out of nothing with QEIII. Likely this will occur in late summer to pump up the market just prior to the election. After that we will all be screwed, except the millionaires and billionaires that the Dems like to demonize. The hidden tax of inflation is killing the middle class.

[sjc_1]

There has been a war on the middle class since Reagan. The plan is to have the richest 10% and everyone else. The Republicans will do what the rich want in exchange for the illusion of power.

[Bill-Ellis]

Inflation ? You Ron paul types have been predicting hyper inflation since 2008. Now you are imagining it.

[sandiegopete]

The Fed has essentially set their interest rate at 0%. There is a build up of inflationary pressure and it will burst through without an attendant increase in economic activity. What does that spell?

There is nothing Bernanke can do about it.

[skeezix06]

He probably wants to clean his glasses off so he can see. The economy is past the point of sagging.

[deadjesus]

not a word mentioned about the foreclosure crisis and the spiraling lost of home equity and the rise of household debt; oh, I forgot job loss. these four things need to be stopped now before the Federal Reserve can act correctly let alone the fiscal policies of our congressional branch.

this equates to business regulation. this open market, let the peoples actions dictate the market and let the US Federal Reserve clean up the mess will not work; GREED is not a human virtue, but a sickness! .

[maysonl]

Janet Yellen is not just a governor, she's Fed Vice Chairman.

[foosion100]

He's waiting for rain in the midst of Noah's flood