Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank “will do all that it can” to ensure a continuation of the economic recovery, and outlined steps it might take if the growth slows.
“The Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly,” the Fed Chairman said today in opening remarks to central bankers from around the world at the Kansas City Fed’s annual monetary symposium held in Jackson Hole, Wyoming.
The Fed chairman gave a detailed analysis of the economy and said growth during the past year has been “too slow” and unemployment “too high.” Still, he said a handoff from fiscal stimulus and inventory re-stocking to consumer spending and business investment “appears to be under way.” He also said that the “preconditions” for growth in 2011 are “in place.”
Bernanke said the risk of an “undesirable rise in inflation or of significant further disinflation seems low.” He said the Fed has several tools if prices decelerate, or job growth stagnates, including shifting the composition of its bond reinvestment strategy.
Federal Reserve officials put their exit strategy on hold this month and decided to purchase Treasury securities to keep their portfolio from shrinking as their mortgage bonds mature. Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. say the Fed could boost monetary stimulus if the economy continues to deteriorate.
Securities Holdings
“The FOMC’s recent decision to stabilize the Federal Reserve’s securities holdings should promote financial conditions supportive of recovery,” Bernanke said in the 19- page text of his prepared remarks. “Additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions.”
The Kansas City Fed is hosting central bankers from more than 40 countries including Brazil, Malawi and New Zealand this year as well as economists from firms such as Bank of America Corp., Morgan Stanley and International Strategy & Investment Group Inc. U.S. central bankers next meet Sept. 21 for a one-day meeting.
Growth Slows
The Commerce Department today cut its estimate for U.S. economic growth in the second quarter to an annual pace of 1.6 percent from an initially reported 2.4 percent pace. Reports on employment, manufacturing and housing in the past month have indicated the recovery is faltering.
“Incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat lower than most FOMC participants projected earlier this year,” Bernanke said. “Consumer spending may continue to grow relatively slowly in the near term.”
The economy is expanding at about a 1.7 percent annual rate in the current quarter, according to estimates by Macroeconomic Advisers in St. Louis. Capital spending declined in July, and sales of existing homes fell a record 27 percent. Manufacturing in the Philadelphia region weakened in August, according to an index compiled by the Philadelphia Fed.
Cisco Systems Inc., the world’s largest maker of networking equipment, this month forecast first-quarter sales that missed analysts’ estimates. Chief Executive Officer John Chambers said the San Jose, California-based company was seeing “unusual uncertainty” and getting “mixed signals” about the health of the economy.
“Investment in equipment and software will almost certainly increase more slowly over the remainder of this year, though it should continue to advance at a solid pace, ” Bernanke said.
Unemployment Higher
Back-to-back quarters of growth below 2 percent are likely to push unemployment higher and put more downward pressure on inflation, which is already lower than the Fed’s longer-term desired range, economists say.
“The Fed would definitely like to see faster growth than what we are looking at in the middle two quarters of this year,” Ben Herzon, senior economist at Macroeconomic Advisers, said before the speech. “It is going to put downward pressure on inflation.”
Economists estimate that the unemployment rate will rise to 9.6 percent in August from 9.5 percent in June and July, according to the median forecast in a Bloomberg News survey. The Fed’s preferred inflation indicator, the personal consumption expenditures price index, minus food and energy, rose at a 1.1 percent annual rate in the second quarter.
Inflation Expectations
Fed officials said in June their longer-run preference range for inflation is 1.7 percent to 2 percent. Market measures of inflation expectations have also declined, said Michael Pond, co-head of interest rate strategy at Barclays Capital Inc., New York.
Barclays’ measure of average annual inflation rates for five years, starting five years from now, show a decline to 1.96 percent from 2.31 percent when Fed the Federal Open Market Committee met on Aug. 10.
Pond said the Fed’s reduced outlook for the economy has pushed inflation expectations lower. That threatens to undermine the Fed’s goal of keeping prices stable at around 2 percent.
“They led the markets to believe that the economic outlook had downshifted,” Pond said before the speech. “Since then, we’ve seen a sharp downturn in inflation expectations.”
Household confidence has also been undermined by falling stock prices. The Standard and Poor’s 500 stock index is down 5.7 percent this year. The Conference Board’s Consumer Confidence Index fell to 50.4 in July, the lowest in five months.
Mortgage Debt
Central bankers this month decided to reinvest about $18 billion a month of maturing agency and mortgage-backed securities back into U.S. Treasuries. They also adopted a $2.05 trillion floor for their securities portfolio.
The strategy left investors confused about the Fed’s goals, said Laurence Meyer, a former Fed governor.
“The Fed’s communications efforts have faltered of late,” Meyer, vice chairman of Macroeconomic Advisers, said before the speech. “The markets did not fully understand how to interpret the meaning of what the FOMC did and said in August.”
The Dow Jones Industrial Average has fallen 6.2 percent since Aug. 10, and the yield on the 10-year Treasury note has slid to 2.48 percent from 2.83 percent.
The Fed’s previous purchases of about $1.25 trillion in mortgage-backed securities were focused on what Bernanke called “credit easing,” or pushing down rates on mortgages to support housing.
The Fed may be trying to reduce U.S. Treasury interest rates, and force down interest rates on corporate bonds, mortgages and other fixed income securities in tandem.
Michael Feroli, chief U.S. economist at JPMorgan, said the Fed could buy up to $1 trillion more in U.S. Treasuries securities as needed if the economy continues to move away from the central bank’s dual mandate of stable prices and full employment.
“Sub-trend growth is inconsistent with the dual mandate” from Congress to promote full employment and price stability, Feroli said before the speech.
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