Federal Reserve Chairman Ben Bernanke voiced optimism Friday that the United States can avoid prolonged stagnation, but that outcome, he said, can’t be achieved through Fed policy alone.
Here’s a rough translation of what he said in a major speech at a conference for central bankers in Jackson Hole, Wyo.: The economy can grow normally again, but President Obama and Congress, as well as folks in Europe, need to step up to make that happen.
Bernanke wasn’t arguing that the Fed has no further role to play. The central bank will examine options for monetary policy at a meeting in September, he said. Yet the Fed, he emphasized, can do only so much.
While saying the Fed has a “range of tools” that can still be deployed to nudge the economy in the short run, Bernanke said the economy now faces a twofold challenge: spurring activity by consumers and businesses in the near-term, and doing so in a way that also sets a solid foundation for long-term growth.
“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” he said.
When the text of Bernanke’s speech was released, U.S. stock prices initially sagged, perhaps because he shied away from any specifics on possible changes to Fed policy. No hint of “QE3” (a third round of so-called quantitative easing), other than to say that options will be discussed.
But soon investors pushed stock prices back up. Various factors may have been involved — including some unrelated to the Jackson Hole speech — but some market analysts said traders were cheered by both Bernanke’s cautious optimism and his wake-up call to other policymakers.
His appeal to politicians in Washington, who have locked horns recently over taxes and spending, was pointed: “Without significant policy changes,” he said, “the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.”
Bernanke’s message to European leaders was more subtle: “I have confidence that our European colleagues fully appreciate what is at stake in the difficult issues they are now confronting.”
Beyond fiscal policies on things like government debt, a range of other policies outside central-bank control have a big role in the economy’s long-run performance. Such policies include everything from business regulation to policies for trade and education.
The Jackson Hole speech comes at a difficult time for the economy on several fronts. Foremost are the dangers that a “slow patch” in growth could turn into a new US recession and that turmoil in Europe over high-debt nations could spark a banking crisis there.
The recovery from recession has been disappointingly weak, Bernanke acknowledged.
In Washington, Democrats and Republicans are about to convene a new round of talks over the fractious issue of fiscal policy, including entitlement reforms. Bernanke didn’t give much in the way of direct advice to the president and Congress, but the speech included a caution regarding the delicate timing of fiscal reforms.
“Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery,” Bernanke said. In other words, reducing deficit spending by the government too fast could damage the recovery.
The challenge is manageable, Bernanke said, since fiscal reforms can be phased in slowly.
He pledged vigilance on the Fed’s own policy role, which includes keeping inflation low while trying to encourage a recovery in business activity and jobs. Bernanke said he expects the economy will avoid tipping into recession.
Credit availability is improving, households have made progress reducing their debt burdens, and oil prices have fallen in a shift that should boost consumer purchasing power, he said.
Mark Trumbull writes for the Christian Science Monitor.