On February 29th, Federal Reserve Chairman Ben Bernanke gave his biannual “Humphrey-Hawkins” report on monetary policy to Congress. In short, Mr. Bernanke testified that the “recovery of the U.S. economy continues, but the pace of expansion has been uneven and modest by historical standards.”
Mr. Bernanke noted recent “positive developments in the labor market” but said that the job market remains “far from normal.” He indicated very little worry about inflation even with the recent rise in energy prices. He pointed to advanced household spending in 2011, even though “the fundamentals that support spending continue to be weak: real household income and wealth were flat in 2011 and access to credit remained restricted for many potential borrowers.”
In the housing sector, he testified that affordability has increased, however many potential buyers lack the down payment and credit history to qualify for loans and others are reluctant to buy due to their concerns about “their income, employment prospects and the future path of home prices.” Mr. Bernanke outlined increases in manufacturing production and capital expenditures, yet indicated that the consensus of the Federal Open Market Committee is that GDP will increase overall by only 2.5% in 2012.
Mr. Bernanke indicated that the target range for the federal funds rate remains at 0-1/4% and is expected to stay near that until the end of 2014. If so, mortgage rates should stay low and C.D. rates will be just slightly above zero for the next three years. He left the door open to a new program of mortgage-bond purchases to drive long-term rates even lower.
The Fed Chairman testified that a number of “constructive policy actions have been taken of late in Europe”. He continued, “We are in frequent contact with our counterparts in Europe and will continue to follow the situation closely.” One day after Mr. Bernanke’s testimony, the Euro-zone finance ministers said they were ready to give Greece the money it needs provided a bond swap that will cut the debt Greece owes it private creditors goes according to plan this week. At the same time, European economic data released on March 1st was grim. Overall unemployment hit a 15 year high, while inflation unexpectedly accelerated.
Zanny Minton Beddoes, of the Economist speaking on NPR’s Morning Edition last week, put the potential impact of the European problems on the America recovery this way: “In the past few months, the Europeans have successfully covered their festering sore with a massive, great Band-Aid. And, now the acute crisis has turned into a chronic one. With that, we can take off the table the risk of a financial catastrophe in Europe.” Let’s hope so. We’d like to keep the momentum going on our current U.S. recovery.