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Thursday, June 20, 2024 | Back issues
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Bernanke Predicts Modest|Growth, Uptick in Spending

WASHINGTON (CN) - Federal Reserve Chair Ben Bernanke said economic growth would continue to be "relatively modest" due to persistent high unemployment and dampened consumer demand, though he said he expects an uptick in consumer spending next year.

"Sustained expansion must ultimately be grown by private demand," Bernanke said Friday at the Federal Reserve Bank of Boston.

The U.S. economy began recovering from the recession in July 2009, the Fed chair said, with firms beginning to strengthen their balance sheets and add inventory, but the unemployment rate has remained stubbornly high, hovering at around 9.6 percent for months.

"High unemployment is currently forecast to persist for some time," Bernanke said, adding that it was "clearly too high."

Although the Fed has adopted expansionary monetary policies to combat unemployment, such as lowering interest rates, a mix of weakened consumer demand for goods and services and tight credit for small businesses continues to stifle job growth.

Bernanke said consumer spending, a huge facet of economic sustainability, has been hindered by "painfully slow" job growth.

Since June, the private sector has added an average of 85,000 jobs a month. By contrast, the economy lost 8 million jobs in 2008 and 2009.

Bernanke said the bulk of unemployment was caused by the shock in the markets that led to the financial collapse, not structural factors. He said unemployment was policymakers' top concern, because the situation dampens consumer demand, a huge factor in economic health.

Although U.S. households' savings are up, housing assets have risen, and debt has lowered relative to income, Bernanke said looming foreclosures were a significant drag on the housing market.

Also, business investment in software and other products has slowed compared to earlier this year.

Bernanke said that while large firms can easily obtain credit and have strong balance sheets, bank-dependent smaller firms are having a harder time accessing credit and, as a result, have weaker balance sheets.

But he said banks are slowly becoming more proactive in seeking out credit-worthy borrowers.

Bernanke said he expects a pickup of economic growth next year due to a "somewhat faster pace" of household spending.

By statutory mandate, the Fed is required to help the economy reach maximum employment and price stability. The Fed, along with the world's other central banks, aim to maintain both an unemployment rate and inflation rate that are "modestly positive," or slightly above zero, in order to create room for natural shifts in the economy.

Bernanke said inflation trends would remain "subdued," keeping with what people expect for long-term inflation, which is around 2 percent. Inflation trended from 2.5 percent to 1.1 percent during the first eight months of the year.

Bernanke said the Fed is considering unconventional options for accelerating economic recovery, such as expand the Fed's holdings, but warned that such policy changes have possible costs.

If the Fed starts purchasing longer-term securities, something it has "much less history" of doing than other types of action, Bernanke said, consumers may expect it to cause inflation and lose confidence in the Fed.

The Fed's Open Market Committee, which makes decisions about interest rates and overall monetary supply, is scheduled to meet in early November.

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