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U.S. Federal Reserve Chairman Ben Bernanke Friday stopped short of signaling further action to boost the U.S. recovery, but said it was critical for the economy's health to reduce unemployment.
Bernanke said the central bank had marked down its outlook for U.S. economic growth and made clear the policy focus was still on spurring a stronger recovery, but he did not provide any fresh details on steps the Fed could take.
"It is clear the recovery from the crisis has been much less robust than we had hoped," he said.
Bernanke's speech at a central banking conference appeared to disappoint some market participants who had hoped the Fed chairman would make a clear case for a further easing of monetary policy. The U.S. dollar strengthened and stocks added to losses on his comments.
"The growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years," Bernanke said. "The economic healing will take a while, and there may be setbacks along the way," he added. "However ... the healing process should not leave major scars."
While expressing long-term optimism, Bernanke made plain the central bank found recent developments troubling, and he said the Fed would expand its September policy meeting to two days from one to discuss its options.
However, Bernanke also stressed that most of the burden for ensuring a solid foundation for long-term growth lay at the feet of the White House and U.S. Congress.
"Financial stress has been and continues to be a significant drag on the recovery, both here and abroad," he said. "It is difficult to judge by how much these developments have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth."
Earlier this month, the Fed said it expected to hold overnight U.S. interest rates near zero for at least the next two years and it was examining other steps it could take to bolster growth.
Some investors have begun to hope the central bank, which has already bought $2.3 trillion US in bonds, would launch a fresh round of asset purchases, although many analysts think more modest steps, such as shifting the Fed's securities holdings into longer maturities, are more likely.
Bernanke simply reiterated language from the Fed's latest policy statement that the central bank was examining its options and was prepared to act as needed.
"Monetary policy must be responsive to changes in the economy and, in particular, to the outlook for growth and inflation," he said. He repeated the Fed's view that easing commodity prices should bring inflation into line with the Fed's 2 percent or under goal.
A weak raft of economic data have led economists to say chances of a fresh U.S. recession could range as high as 50 percent.
The economy grew at a paltry 1 percent annual rate in the second quarter as consumer spending notched its smallest gain since the final three months of 2009, the government said Friday. It grew only 0.4 percent in the first quarter.
At the same time, Europe is strangled by a debt crisis that is undercutting growth prospects there.
As gloomy news on the U.S. economy mounted in recent weeks, stock markets plunged and speculation grew the Fed would crank up its crisis-fighting operation. The yield on the 10-year Treasury note hit a new low.
In an interview with CNBC ahead of Bernanke's remarks, Philadelphia Federal Reserve Bank President Charles Plosser said further bond purchases by the Fed would do the economy little good.
"I'm not sure it would be beneficial to the problems that we are facing," Philadelphia Federal Reserve Bank President Charles Plosser told CNBC.
Plosser is one of the central bank's leading inflation hawks, and he dissented earlier this month against the central bank's decision to inform markets that it expected to hold interest rates ultra-low for at least two years.
A BALANCE SHEET FIX
Fed officials have discussed buying more longer-term debt and selling short-term securities, an operation that could increase downward pressures on long-term interest rates without further bloating the central bank's balance sheet.
Beyond providing a psychological boost, lower long-term rates could encourage home and car purchases, and business investments.
"These are small moves," Wells Fargo economist John Silvia said ahead of Bernanke's remarks. "This is not the time to put up full sails."
Even some Fed policymakers admit changing the Fed's holdings to twist down the longer end of the interest rate curve might do little good.
"A twist operation would not have every much effect. It's been analyzed many times," St. Louis Federal Reserve Bank President James Bullard told Reuters on the conference sidelines.