Fed Offers Higher Ground In Economic Mudslide

It's not a good sign when lower economic growth figures count as good news because Wall Street was expecting them to be even worse. But markets took encouragement Friday from Federal Reserve Board Chair Ben Bernanke's pledge of support if the recovery continues to weaken.

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Federal Reserve Chairman Ben Bernanke says the Fed is prepared to provide additional support if the U.S. economy gets any weaker. He spoke shortly after the Commerce Department reported that the economy grew only very slowly this spring. But even that modest level of growth was better than some forecasters had expected.

The Dow Jones Industrial Average gained more than 164 points yesterday after the report. Mr. Bernanke cautioned that central bankers can't fix the economy on their own. He says the rest of the government and the private sector also has to play a role. NPR's Scott Horsley reports.

SCOTT HORSLEY: Investors have been taking a beating in recent days as markets reacted to a string of lousy economic reports. They were racing for another blow yesterday when the Commerce Department reported second quarter economic growth. The economy grew at a rate of just 1.6 percent this spring, less than half the growth rate of the first quarter. Still, forecasters had been worried the number would be even worse.

Mr. ROBERT DYE (Senior Economist, PNC Financial Services): It's all relative to expectations, and I think this report is mildly or slightly better than expectations, but it's still a weak number.

HORSLEY: Senior economist Robert Dye of PNC Financial Services doesn't expect a double-dip recession, although he says the risk of one is growing. What he does expect is more sluggish growth, and that's little comfort to people who are looking for work.

Mr. DYE: If the economy is that much closer to stall speed and not there already, the potential here is if we're stuck in this low-growth pattern that we actually see a stable or rising unemployment rate and that would not be a good thing.

HORSLEY: Unemployment already stands at nine-and-a-half percent. White House economic adviser Christina Romer said this month while private employers are hiring, they're not doing so fast enough.

Ms. CHRISTINA ROMER (White House Economic Adviser): What we've always known is this is - is not just an ordinary recovery, because it wasn't an ordinary recession. And so the usual drivers of the recovery are typically housing, things like that. And of course this recession started in an over-supply of housing, a bubble, and so you don't have that natural, well(ph), housing starts to grow quickly afterwards.

HORSLEY: Indeed, we learned this week that home sales plunged last month, despite rock-bottom mortgage rates. The administration is looking to exports and business investment as alternatives to prop up the economy. But after strong showings earlier in the year, those have been disappointing too.

It was against that backdrop that Fed Chairman Ben Bernanke spoke yesterday at an economic conference in Jackson Hole, Wyoming. Bernanke said the Fed still has ammunition it could use to support the economy. But PNC's Dye says the chairman isn't ready to pull the trigger yet.

Mr. DYE: Ideally, what the Fed would like to do right now is nothing and let the economy start to improve, given what they have already done, without having to go back in. But if the economy does turn south, the Fed has really outlined a program to, again, try to bring the economy back.

HORSLEY: Economist Nigel Gault of IHS Global Insight says the steps Bernanke outlined might help to lower interest rates even further, but those rates are already at historic lows, so Gault's not sure digging deeper would make that much difference.

Mr. NIGEL GAULT (Economist, IHS Global Insight): They can't perform magic, and to some extent unfortunately the problem can only be fixed by time.

HORSLEY: This week, the nonpartisan Congressional Budget Office issued a report saying the government's stimulus program has helped to cushion the economic blow. The CBO said without it as many as 3.3 million more people might have been out of work. So should there be another big round of stimulus tax cuts and government spending? Gault says we shouldn't hold our breath.

Mr. GAULT: It's really a moot point now because, unfortunately, whether correctly or not, stimulus has now become quite discredited and there is simply no way that the administration could get a major package through Congress even if it wanted to try.

HORSLEY: The big debate in Congress this fall is likely to be whether to extend some or all of the Bush tax cuts, due to expire at year's end. The CBO says preserving those cuts provides relatively little economic bang for the buck.

Scott Horsley, NPR News, Washington.

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