BEN BERNANKE dashed market hopes that the Federal Reserve is about to unleash another monetary stimulus as he made a plea for the US Congress to take action on fiscal policy.
“Monetary policy is not a panacea, it would be much better to have a broad-based policy effort addressing a whole variety of issues,” said the Fed chairman.
“I’d be much more comfortable if, in fact, Congress would take some of this burden from us and address those issues.”
In a measured testimony before the joint economic committee yesterday, Mr Bernanke said growth looked set to continue “at a moderate pace”, but he made it clear that the central bank was ready to respond to a euro zone crisis.
“The situation in Europe poses significant risks to the US financial system and economy and must be monitored closely. As always, the Federal Reserve remains prepared to take action as needed.”
Weak US jobs data for April and May, plus growing turmoil in the euro zone, has led to expectations that the Fed will ease monetary policy at its next vote on June 20th. That might involve another round of asset purchases – nicknamed QE3 – aimed at driving down longer-term interest rates.
However, Mr Bernanke’s comments suggest he is not yet certain if the weakness in the labour market will continue, while his reference to action was conditional on financial conditions worsening.
He did not discuss policy options for Fed action, but last night vice-chairwoman Janet Yellen hinted that further balance sheet changes – such as buying more bonds in a third round of quantitative easing – might be most suitable.
As he increasingly does on his trips to Capitol Hill, Mr Bernanke took US legislators to task for their failure to tackle medium-term fiscal policy.
“A severe tightening of fiscal policy at the beginning of next year that is built into current law – the so-called fiscal cliff – would, if allowed to occur, pose a significant threat to the recovery. Fortunately, avoiding the fiscal cliff and achieving long-term fiscal sustainability are fully compatible and mutually reinforcing objectives.
“Preventing a sudden and severe contraction in fiscal policy will support the transition back to full employment.” – Copyright The Financial Times Limited 2012
