Federal Reserve Chairman Ben Bernanke said Tuesday that “cautious” consumers, deep in debt and fearful for their jobs, represent the biggest drag on an economy he described as “close to faltering.”
“Consumer behavior has both reflected and contributed to the slow pace of recovery. Households have been very cautious in their spending decisions, as declines in house prices and in the values of financial assets have reduced household wealth, and many families continue to struggle with high debt burdens or reduced access to credit,” Bernanke said in prepared remarks before a Congressional committee.
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In addition, with the unemployment rate hovering stubbornly around 9%, consumers have been reluctant to spend, driving down demand for goods and holding back growth, Bernanke said. Consumer spending makes up 70% of the U.S. economy.
A stagnant housing market has also contributed significantly to the lack of economic growth, he told the Joint Economic Committee of Congress.
Bernanke said the European debt crisis has had a significant impact in the U.S., notably in creating volatility in the stock markets, which adds to consumers’ fears. But there’s only so much the U.S. can do about Europe’s economic woes, he said, the rest is up to European leaders.
Most of Bernanke’s comments reiterated positions he’s taken for months: economic growth in the second half of 2011 will be slower than previously forecasted; federal budget deficits are running at unsustainable levels; inflation is an ongoing concern but not yet a top priority.
However, in a departure from earlier remarks and seemingly aimed at Congressional Republicans, many of whom oppose Bernanke’s interventionist fiscal strategies, Bernanke said fiscal policy makers must “avoid fiscal actions that could impede the ongoing economic recovery.”
While cutting budgets for the long-term is clearly important, the economic realities of the moment require immediate attention, he explained. The two objectives, he said, “are certainly not incompatible, as putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term.”
A group of Republican Congressional leaders, in a very public gesture last month, sent Fed policy makers a letter ahead of the most recent meeting the Federal Open Markets Committee, which sets most Fed policy, urging the group to take no further action to stimulate the economy.
Opponents of the Fed’s interventions, which have included nearly three years of rock bottom interest rates, the injection of more than $1 trillion of cash into financial markets, and most recently, the Fed’s decision to shift $400 billion of its portfolio from short-term to long-term securities, say the policies haven’t worked and might be hampering growth.
Dissension has been marked even among 10 members of the FOMC, three of whom have voted against each of the committee’s last two actions.
As expected, Bernanke defended the two most recent moves, the portfolio shift, dubbed “Operation Twist,” and a decision to keep interest rates low until mid-2013, and didn’t back away from further actions.
“The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability,” he said.
Under questioning from members of the committee, Bernanke said the Fed had no plans for another round of quantitative easing, in which the Fed buys U.S. securities to pump liquidity into the financial system. But “we never take anything off the table” because the economy can be unpredictable, he said.
Bernanke also speculated that U.S. corporations are holding onto as much as $2 trillion in cash because they remain “uncertain about the strength of recovery.”
Companies have been reluctant to use that money to expand and hire, a factor that has contributed to the economic slowdown.