WASHINGTON — Federal Reserve Chairman Ben Bernanke sketched a bleak picture of the U.S. economy Tuesday – and warned it will darken further if Congress doesn't reach agreement soon to avert a budget crisis.
Without an agreement, tax increases and deep spending cuts would take effect at year's end. Bernanke noted what the Congressional Budget Office has warned: A recession would occur, and 1.25 million fewer jobs would be created in 2013.
The Fed is prepared to take further action to try to help the economy if unemployment stays high, he said. Bernanke didn't signal what steps the Fed might take or whether any action was imminent. And he noted there's only so much the Fed can do.
But the Fed chairman made clear his most urgent concern is what would happen to the economy if Congress can't resolve its budget impasse before the year ends.
Cuts in taxes on income, dividends and capital gains would expire. So would this year's Social Security tax cut and businesses tax reductions. Defense and domestic programs would be slashed. And emergency benefits for the long-term unemployed would run out.
All that "would greatly delay the recovery that we're hoping to facilitate," Bernanke said near the end of two hours of testimony to the Senate Banking Committee.
Bernanke was giving his twice-a-year report to Congress on the state of the economy. He will testify Wednesday before the House Financial Services Committee.
The economy is growing modestly but has weakened, Bernanke said. Manufacturing has slowed. Consumers are spending less. And job growth has slumped to an average of 75,000 a month in the April-June quarter from 226,000 a month from January through March. The unemployment rate is stuck at 8.2 percent.
Bernanke noted that the economy, after growing at a 2.5 percent annual rate in the second half of 2011, slowed to roughly 2 percent from January through March. And it likely weakened further in the April-June period.
Congress needs to resolve its impasse well before the year ends, Bernanke said.
"Doing so would help reduce uncertainty and boost household and business confidence," he said.
The cuts that would kick in next year could cost as many as 2 million jobs, a trade group that represents manufacturers said in a report released Tuesday. The report came from the Aerospace Industries Association.
A separate report Tuesday pointed to the budget crises many states are suffering, caused in part by shrinking revenue from the federal government. States are finding it harder to pay for basic services such as law enforcement, local schools and transportation, the report said. It was issued by the State Budget Crisis Task Force, a non-profit co-chaired by former Federal Reserve Chairman Paul Volcker and former New York Lieutenant Governor Richard Ravitch.
Republicans in Congress are demanding deeper spending cuts while extending income tax cuts for everyone. Democrats want to extend the tax cuts for middle- and lower-class Americans. But they want them to expire for people in the highest-income brackets.
Bernanke stopped short of telling Congress what steps to take. He challenged them to think broadly.
"Congress is in charge here, not the Federal Reserve," he said.
The economy's challenges go beyond the budget impasse, Bernanke said. Lawmakers must also produce a long-term plan to shrink federal budget deficits. Otherwise, he said the United States could eventually suffer a financial crisis marked by rising interest rates. Consumers and businesses would have to pay more for mortgages and many other kinds of loans.
"It would be very costly to our economy," Bernanke said.
Stocks rose sharply despite Bernanke's grim assessment. The Dow Jones industrial average climbed more than 90 points, and broader indexes also gained.
The Fed chairman also said Europe's debt crisis poses a serious threat to the U.S. economy. He said the Fed has been working with U.S. banks to ensure they've taken steps to prepare for a crisis.
"Although I have every hope and expectation that the European leaders will find solutions, there is a risk of a more serious financial blowup," Bernanke said.
Investors had hoped Bernanke would signal another round of bond purchases, to drive down long-term interest rates and encourage more borrowing and spending. But they seemed to shrug off the downbeat outlook and focused on stronger earnings reported by Mattel, Coca-Cola and other big companies.
At least one senator implored Bernanke to take action now.
"Given the political realities of this year's election, I believe the Fed is the only game in town," Sen. Charles Schumer, D-N.Y., said. "I would urge you, now more than ever, to take whatever actions are warranted."
"So get to work, Mr. Chairman," Schumer added.
Even if the Fed announces another round of bond purchases, some economists question how much it might help. They note that mortgage rates and other key borrowing rates are already at record lows.
The economy was already sputtering when the Fed's policymaking committee last met June 19-20. At that meeting, the Fed decided to extend a program that shifts its bond portfolio to try to lower long-term interest rates. The Fed also reiterated its plan to keep its key short-term interest rate near zero until at least late 2014.
Minutes of the June meeting show that Fed officials were open to taking further action – but were divided over whether the economy needs help now.
Former Fed official Roberto Perli, managing director at the research firm International Strategy & Investment, doubts the Fed will take action at its next meeting July 31-Aug. 1, preferring to wait for more evidence of where the economy is headed.
But if growth and job creation continue to weaken, he says, Fed policymakers might unveil another round of bond purchases at its Sept. 12-13 meeting.
And with that bit of insight, the plug on this hearing is mercifully pulled.
What did we learn today?
- The Fed might just do something to help the economy, maybe, if enough people get unemployed.
- The Fed wants financial reporters to do its dirty work in keeping an eye out for monkey business in financial markets.
- Not everybody at the Fed fully grasps what this "Libor" thing is of which you speak.
- The Bush economy was the greatest economy of all time.
Thanks everybody for reading and commenting and such. Let's be careful out there.
-- Mark Gongloff
What would get the Fed to do more to help the economy, asks Kay Hagan (D-N.C.)
Bernanke wants to see unemployment going down, not up. So there you have it: Unemployment down, not up.
Why is the Fed extending the maturities of its Treasury holdings rather than ZZZZZZZZZZZZZ.
Let's talk about the role the New York Fed is taking in drafting Dodd-Frank rules on credit-risk retention in derivatives trades. Let's get it oZZZZZZZZZZZZZZZ.
This is the portion of our program in which we discuss possible Libor replacements. Repo rates! The OIS rate! The ZZZZZZZZZZZZZZZZ.
| @ philizzo : Sen defending Bush policies by citing unempl rates in 2006. Like saying grenade not dangerous cause hand was fine 5 min before it went off. |
I mean, if I'm now going to be doing the regulating for the Fed, it's only fair.
Jeff Merkley (D-Ore.) also wonders why the Fed didn't alert the market that Libor was being manipulated, marking a rare moment of bipartisan harmony in calling BS on Bernanke's defense of the Fed's actions.
Bernanke reluctantly agrees that "it's important people know about" this key interest rate being bogus. But he says he disagrees that Libor manipulation was unknown -- "the press was full of stories about it."
The Fed: Outsourcing its duties to the financial press since at least 2008.
| @ BCAppelbaum : A GOP senator just spoke in defense of the housing bubble, noting that unemployment was much lower back then. |
"What happened in 2008?" asks Wicker Man.
Bernanke's head explodes, along with Twitter.
Roger Wicker (R-Miss.) says we had low unemployment for much of the decade, until that bit of unpleasantness in 2008, which proves that everything the Bush administration did was perfect economically.
Fortunately, he doesn't really ask Bernanke to agree with him.
For this hearing, anyway, says Mark Warner (D-Va.), who is now my best friend in the world.
Bernanke says a New York Fed employee who called Barclays back in 2008 didn't know what Libor was, exactly.
Ladies and gentlemen, this is your Federal Reserve.
Unbelievable.
| @ pdacosta : Bernanke's "we don't have the authority" argument on Libor is pretty thin.The Fed failed to raise the issue publicly. |
| @ steveliesman : Toomey asked best ?s of Bernanke on Libor. Seems only BB defense of why it didn't do more is Geithner wrote memo. Seemed insufficient. |
| @ DLeonhardt : Is Bernanke (no new stimulus) the Greenspan to Obama's Bush '92? |
Herb Kohl (D-Wisconsin) asks why the heck the Fed is doing nothing when unemployment is so high.
Just like with Libor, Bernanke says the Fed has acted already, get off its back, gosh.
And it is thinking very seriously about whether to act again! Maybe! It's watching the data, at leaste. Many stern memos may well be typed in the near future.
Toomey is really hammering Bernanke on his not doing anything about Libor. We don't have any control over Libor, Bernanke complains.
But Toomey's right: Bernanke has a bully pulpit and could have said stuff in public about fixing Libor or moving market measures away from reliance on Libor. It never did.
Just like a regular schlub or like Mervyn King, Bernanke says he found out about Libor manipulation happening, maybe, when he read it in the newspaper.
Do we seriously believe this?
Pat Toomey (R-Pa.) says the economy is being buried under a "regulatory avalanche." Having obviously slept through the 5-minute list of bank scandals his colleague just ran through.
And then in practically the same breath he complains about how local governments in Pennyslvania got ripped off by interest-rate swaps because of the Libor scandal.
Again, what would be so wrong with a regulatory avalanche at this point? Maybe a regulatory mudslide, at the very least?
Sherrod Brown (D-Ohio) spends 5 minutes listing all of the various banking scandals going on right now.
"No wonder the public doesn't trust you or us or the banks," he says.
"So many of our biggest banks are too big to manage, too big to regulate," he says, setting up his question: "True?"
Bernanke laughs.
"There have been many bad practices," he agrees -- but he also says most were tied to the crisis.
Come on, Ben, yeesh, not really.
The Beard To Be Feared argues that we wouldn't know about all of these scandals if it weren't for crack regulators digging them up. No one laughs, for some reason.
He does agree that banks being too big to fail is a problem, though it's hard to find a sentient human being not named Jamie Dimon who doesn't agree with that by this point.
| @ AnthonyBSanders : Throw the booklet at them with a memo. RT @donnaborak #Bernanke backs NYFed saying there had been a substantial response. #libor |
This is a fun discussion: Daniel Akaka (D-Hawaii) asks about what we can do to support tourism. Bernanke says tourism is good.
Also, "Aloha" means goodbye, and also hello. It's in how you inflect. (Apologies to Pavement.)
| @ TBPInvictus : Here's the scandal: Wasting all this time talking about LIBOR with an 8.2% unrate. This is shameful. |
David Vitter (R-Huggies) asks a pertinent question! Why did the Fed not come down on the Libor-reporting U.S. banks it is supposed to be regulating?
Bernanke kind of sputters about how this is all the fault of the British, remember when he said that? Earlier?
Vitter to his credit doesn't let up. Bernanke really has no answer, aside from pointing out that these U.S. banks are under investigation in the Libor scandal, so what else do you want him to do, jeez?
Bob Menendez (D-Sopranos) sees the Libor scandal as a sign that Wall Street has a culture of greed and general horribleness. Gosh, maybe so.
This and other shocking findings in the August issue of "DUH" magazine.
| @ carlquintanilla : @morningmoneyben @TheStalwart Those aren't lights. It's a camera iris, operated by a photographer with a sense of humor. #Bernanke |
| @ CritterDJ : #Bernanke wearing darker tie than usual to Hump-Hawk. During Greenspan era, this would have qualified for a sidebar/analysis. |
Jim DeMint (R-S.C.) appears to express deep sadness about Congress putting his fellow Sandlapper Bernanke in the position of having to stimulate the economy.
But then he complains for a small eternity about the unmitigated horrors of quantitative easing.
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By MARTIN CRUTSINGER 07/17/12 06:02 PM ET