06/08/2011 01:29 pm ET Updated Aug 08, 2011

Bernanke Sees No New Federal Reserve Stimulus Despite Flagging Economy

NEW YORK -- Despite troubling signs that the U.S. economic recovery is sputtering, Fed Chairman Ben Bernanke now says the Federal Reserve has no plans to give the economy another boost.

Seven months after the central bank began a historic round of monetary stimulus, growth in the broader economy has been disappointing, Bernanke said Tuesday at a speech at the International Monetary Conference in Atlanta, Georgia. But more help is not on the way from the central bank, Bernanke said. The Fed plans to stay the course, ending its stimulus on schedule this month and keeping monetary policy steady for the immediate future.

Bernanke acknowledged the recovery has fallen short of the central bank's expectations by a number of different measures: Unemployment is high, and workers who do find work often must accept lower wages than they previously earned. Home prices are falling at a newly accelerating rate, making homeowners more vulnerable to default and foreclosure. Oil is trading at levels reminiscent of 2008, when months of record-high fuel prices helped drag the economy into recession.

But the central bank's ability to boost the economy, or its willingness to attempt to do so, has reached a limit.

"It's a hard message," said John Silvia, chief economist at Wells Fargo. "A lot of the issues -- such as, what are you going to do about the federal deficit, what about tax increases, what about spending cuts, what about regulatory policy -- really are outside the purview of the Fed."

Stocks around the world fell after Bernanke spoke. The Standard & Poor's 500 Index slid during his speech, which began about 15 minutes before the closing bell. It continued falling early Wednesday, touching a low more than 0.3 percent below the opening value. But as of 1:25 p.m., the index had climbed back to near its opening mark.

The Stoxx Europe 600 Index fell 1 percent Wednesday morning, to the lowest level in more than two months, Bloomberg News reported. The MSCI Asia Pacific Index fell 0.4 percent, heading toward its lowest level since since May 25, Bloomberg reported.

The central bank's $600 billion asset-purchase program, which buys U.S. debt from private banks in an attempt to push down interest rates and promote the flow of cash through the economy, is scheduled to wrap up by the end of June. The Fed will reinvest maturing debt to maintain the size of its holdings once the program ends and will keep the main interest rate near zero, Bernanke said.

But the Fed has no plans for additional stimulus, despite an economic situation that Bernanke called "uneven across sectors." Indeed, while stocks have soared over the last several months as investors in search of yield have turned toward riskier assets, progress in the broader economy has remained fairly stagnant.

Economic output increased only 1.8 percent at an annualized rate in the first quarter, below expectations, Bernanke said. Globally, gross domestic product is now forecast to grow 3.2 percent this year, slightly below the 3.3 percent prediction in January, according to the World Bank.

"Monetary policy cannot be a panacea," Bernanke said in the speech. "The economy is still producing at levels well below its potential."

It's part of the Fed's mandate to promote maximum employment. But the central bank can only go so far in doing so before it risks creating a situation that could lead to inflation, Bernanke said during a press conference in April.

On its own, the Fed's policy of injecting cash into big banks' reserves isn't necessarily inflationary. But some experts fear that it could lead to inflation once the recovery takes hold as banks increase their lending and the system remains awash in liquidity.

With the Fed having all but exhausted its powers, the legislative arm of the federal government should do its part to promote a recovery, Bernanke said. Washington lawmakers remained locked in a stalemate, effectively fostering uncertainly about the nation's long-term fiscal strategy. The lack of a plan hampers economic progress, Bernanke said.

"If the nation is to have a healthy economic future, policymakers urgently need to put the federal government's finances on a sustainable trajectory," he said during the speech.

But he emphasized that immediate and severe spending cuts could backfire.

"A sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery," he said. "The solution to this dilemma, I believe, lies in recognizing that our nation's fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation."