Bernanke Backs Low Interest Rates
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The U.S. economy is improving, that word today from Federal Reserve Chairman Ben Bernanke speaking before a Congressional committee. But there are still areas of weakness, especially in the job market. Bernanke also said that with inflation tame, the Fed is likely to keep interest rates low for an extended period. And Bernankes words sent stock prices rising.
NPRs Jim Zarroli reports.
JIM ZARROLI: This was Bernankes first trip to Capitol Hill since his reappointment battle last month when he took heat over the way the Fed had handled the big bank bailout. This time, the atmosphere was less contentious. He appeared before the House Financial Services Committee to give his semi-annual assessment of economic conditions. Bernanke said the economy continues to improve. There was no talk of a double-dip recession.
Mr. BEN BERNANKE (Chairman, Federal Reserve): Indeed, the U.S. economy expanded at about a four percent annual rate during the second half of last year.
ZARROLI: But Bernanke said the rebound was due in part to what economists call an inventory correction. Businesses that let their supply of products dwindle during the downturn are now restocking their shelves. If the rebound is really to last, Bernanke said, consumers will have to start buying more.
Mr. BERNANKE: A sustained recovery will depend on continued growth in private-sector final demand for goods and services.
ZARROLI: There already has been some pick up in consumer spending, he said, and business investment is up significantly. But demand wont really take off until the job market improves and right now, its still very weak. Bernanke said he's especially concerned about the growing number of people who remain unemployed for long periods.
Mr. BERNANKE: Indeed, more than 40 percent of the unemployed have been out of work for six months or more, nearly double the share of a year ago.
ZARROLI: And then theres the credit problem. Bernanke said big banks seem to be doing a lot better, but small businesses are having considerable trouble getting credit. Yet for all the problems he cited, Bernanke sounded on the whole surprisingly optimistic, says Mark Vitner, chief economist at Wells Fargo.
Mr. MARK VITNER (Chief Economist, Wells Fargo): He seems to be fairly upbeat about what were seeing in the manufacturing sector, even noting that the manufacturing sector is leading the economic recovery, but a little more downbeat about other parts of the economy, still acknowledging big problems in commercial real estate and ongoing struggles in the housing industry.
ZARROLI: Bernanke spoke at length about the Feds efforts to unwind some of the extraordinary measures that it's taken to prop up the economy. Since last year, for instance, the Fed has been buying up mortgage-backed securities as a way of pumping money into the housing market. It will stop doing so next month. Thats raised concern in some quarters that mortgage rates could rise, but it hasnt happened so far. Bernanke said the Fed would be watching the situation carefully, but he suggested that the impact of the unwinding will probably be mild.
Mr. BERNANKE: These adjustments are not expected to lead to tighter financial conditions for households and businesses, and should not be interpreted as signaling any change in the outlook for monetary policy.
ZARROLI: In fact, he said the Fed plans to keep the interest rates it controls at historically low levels for an extended period of time. It can do that because theres virtually no sign of inflation. Bernanke was asked several times about the growing federal budget deficit. At one point, he conceded that addressing the deficit would probably be good for the economy. Bond markets want to know that the trajectory of bigger and bigger deficits will end.
Mr. BERNANKE: It would be very helpful - even to the current recovery, to markets' confidence - if there were a sustainable, credible plan for a fiscal exit, if you will.
ZARROLI: But for the most part, he demurred. Early on, committee Chairman Barney Frank asked whether concern about the deficit should trump all other government priorities, like passing another stimulus package - something many Democrats advocate. Bernanke dodged the question saying only, there are difficult tradeoffs that have to be made.
Jim Zarroli, NPR News.