June 7 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the economy is at risk from Europe’s debt crisis and the prospect of fiscal tightening in the U.S., while refraining from discussing steps the central bank might take to protect the expansion.
“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Bernanke said today in testimony to the Joint Economic Committee in Washington. “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”
Bernanke also warned lawmakers that “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.”
Bernanke on June 19-20 will lead the Federal Open Market Committee in a policy-setting meeting confronting the slowest employment growth in a year and a worsening debt crisis in Europe. The U.S. added 69,000 jobs last month, the fewest in a year, even as the Fed maintained record stimulus.
Vice Chairman Janet Yellen said yesterday weak job growth and deteriorating financial market conditions show the economy “remains vulnerable to setbacks” and may warrant more accommodation. Two regional Fed bank presidents who vote on policy this year, San Francisco’s John Williams and Atlanta’s Dennis Lockhart, said the Fed should be prepared to take action if the economy deteriorates further.
Bernanke, 58, echoed language from recent Fed statements, saying that the central bank “reviews the size and composition of its securities holdings regularly and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”
The Fed has already purchased $2.3 trillion of securities in two rounds intended to lower borrowing costs and spur hiring. A program known as Operation Twist lengthening the maturities of the Fed’s assets is due to expire this month.
More easing isn’t necessary, Dallas Fed President Richard Fisher and St. Louis Fed President James Bullard said in separate speeches on June 5. Additional stimulus would be “pushing on a string,” Fisher said, while Bullard said there’s time to assess the economy and no need to change policy now. The two regional bank chiefs don’t vote on policy this year.
The central bank said yesterday in its Beige Book business survey that the U.S. economy maintained a moderate pace of growth from early April to late May as factory output rose and the real-estate market improved.
“Economic growth appears poised to continue at a moderate pace over coming quarters, supported in part by accommodative monetary policy,” Bernanke said today. “In particular, increases in household spending have been relatively well sustained.”
The outlook for inflation is “subdued,” and price increases will probably remain at or slightly below the 2 percent level that’s in line with the FOMC’s goal to meet its dual mandate of stable prices and maximum employment, Bernanke said. Higher unemployment and retreating oil and gas prices “should continue to restrain inflationary pressures,” he said.
Bernanke used his appearance before lawmakers to urge them to put fiscal policy on a “sustainable path” while avoiding a “severe tightening” in spending just now that could hamper the economic recovery.
A smoother transition in government spending would help promote full employment, which would be supportive of fiscal accounts, he said, while a credible long-term budget plan “could help keep longer-term interest rates low and improve household and business confidence.”
Views on Crisis
Bernanke also elaborated on his views about the crisis in Europe, saying it was “acting as a drag on our exports, weighing on business and consumer confidence, and pressuring U.S. financial markets and institutions.”
European policy makers will likely need to take additional steps to stabilize their banks, calm their markets, and create a “workable” fiscal framework, Bernanke said.
European Central Bank President Mario Draghi said yesterday that ECB policy makers discussed cutting interest rates to a record low, fueling expectations they’ll act as soon as next month as the intensifying debt crisis curbs growth.
“We monitor all developments closely and we stand ready to act,” Draghi told reporters in Frankfurt after the ECB left its benchmark rate at 1 percent. Risks to the economic outlook have increased and “a few” of the ECB’s Governing Council members called for rate cut at yesterday’s meeting, he said.
Minutes of the FOMC meeting on April 24-25 showed policy makers said a loss of momentum in growth or increased risks to their economic outlook could warrant additional action to preserve the recovery. Members “indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough,” the minutes showed.
The 69,000 jobs added in May was less than half the number forecast by economists and the April total was revised down to 77,000 from 115,000, Labor Department figures showed June 1. The unemployment rate unexpectedly rose to 8.2 percent from 8.1 percent for the first increase since June 2011.
“I am convinced that scope remains for the FOMC to provide further policy accommodation,” Yellen said yesterday. “It may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest.”
Atlanta’s Lockhart said extending Operation Twist is an “option on the table” and that policy makers can do more, while San Francisco’s Williams said the Fed should be ready to step up stimulus in case economic growth slows and threatens to delay improvement in the job market.