Bernanke: Far too Early to Call Victory in Recovery

Federal Reserve Chairman Ben Bernanke said on Tuesday it is too soon to declare victory in the U.S. economic recovery, warning against complacency in policy making as the outlook brightens.
"We haven't quite yet got to the point where we can be completely confident that we're on a track to full recovery," Bernanke told ABC News in a rare on-the-record interview.

The Fed chairman welcomed a decline in the unemployment rate and signs financial strains in debt-stricken Europe were easing. But he said joblessness was still at a troubling high and housing markets still weak.
"I think it's really important not to be complacent. We have a long way to go, a lot of work to do, and we're going to keep doing that."

Asked whether the Fed was considering further action to stimulate growth, Bernanke said the central bank would take no options off the table. However, he did not suggest a further round of bond buying was imminent.

The Fed has kept interest rates near zero since December 2008 and has bought $2.3 trillion of debt through two bond-purchasing programs to stimulate growth.
In a speech on Monday, Bernanke said the U.S. economy would need to grow more quickly to ensure continued progress in reducing the jobless rate. Those comments drove stock prices higher as investors bet a further round of monetary stimulus might be planned.

Stocks rose Monday on optimism Bernanke's remarks signaled the Fed will do more to lower borrowing costs. Traders pushed out bets for a first Fed rate hike to October 2013, from July 2013 just a week earlier.
The U.S. unemployment rate has dropped from 9.1 percent in August to 8.3 percent last month, a decline Fed officials see as out of step with a still-sluggish pace of growth.

Dallas Federal Reserve Bank President Richard Fisher, a monetary policy hawk, on Tuesday agreed that faster growth is needed to boost jobs, although he made clear he is opposed to a further easing of monetary policy.

Eric Rosengren, a policy dove who leads the Boston Fed, said the central bank should ease further if growth slows more than expected. Neither official has a vote this year on the Fed's policy panel.
Another official who is supportive of loose monetary policies, New York Fed President William Dudley, told a congressional panel financial strains in Europe have eased although the Fed continues to monitor the situation carefully.

After its last two meetings, the Fed said it would likely keep overnight borrowing costs near zero at least through late 2014. Bernanke said that was the central bank's best estimate, not a guarantee.

A quickened pace of job creation - the economy has created more than 200,000 jobs in each of the last three months - has fueled speculation the central bank might raise rates sooner.
In both his speech on Monday and the interview on Tuesday, Bernanke appeared to be pushing back against those expectations.

"It's far too early to declare victory," Bernanke told ABC News. "We need to be cautious and make sure this is sustainable."

One drag on growth is likely to come from gasoline prices that have drifted higher on geopolitical worries, Bernanke said.

"That will be a hit on growth," he said. "But at this level ... we don't think it's going to be anything that's going to stall the recovery."

Rising fuel costs are shaping up as one of the biggest issues in the 2012 presidential campaign, as U.S. gasoline prices have jumped about $0.30 per gallon to just over $3.90 within the past month.
Bernanke's ABC News appearance marks the third time the Fed chairman has given an extensive on-the-record, on-camera interview. It was part of a barrage of recent public exposure that has included a profile in a national magazine and a series of college lectures on the Fed and the recent financial crisis.

Bernanke's stepped-up visibility, on top of the launch of news conferences four times a year, appears aimed at counter-balancing some of the harsh criticism leveled at the Fed by Republican presidential candidates. Critics say the Fed's policies have weakened the dollar, hurt savers, and are likely to generate inflation.


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Market Turmoil Turns all Eyes Towards the Fed

Monday's dizzying stock market dive has heightened speculation that the Fed could take steps to ease market jitters that some fear could help topple a teetering economy into recession. The recovery is already sputtering amid weakening manufacturing activity, sluggish retail sales and European debt woes.

"I'm looking for (the central bank) certainly to do something," says Nigel Gault, chief U.S. economist of IHS Global Insight.

Yet Gault, like many economists, says any move likely would involve a largely symbolic change in the language of its policy statement, rather than another big purchase of Treasury bonds aimed at lowering interest rates. And Conrad DeQuadros of RDQ Economics notes the Fed's mission is to keep inflation and unemployment low — not to respond to stock market gyrations.

Plus, "It's too soon to give up on expectations that growth will pick up" in the second half of the year, says Jim O'Sullivan, chief economist of MF Global.

Last fall, the Fed launched $600 billion in Treasury purchases to lower interest rates, following a similar $1.7 trillion stimulus during the financial crisis. Last year, however, the central bank worried about deflation, or falling prices, that could have derailed the recovery. This year, inflation has increased to about 2%, and pumping more money into the economy would fuel concerns about rising prices, DeQuadros says.

What's more, he says, borrowing costs are already at historic lows. "It's not … interest rates that's holding back the economy," he says.

Other Fed options:

•The central bank has been saying interest rates are expected to remain near zero for "an extended period" that's widely understood to mean several months. The Fed could provide a more specific, longer time frame. Policymakers also could clarify they won't sell the Fed's more than $2 trillion in securities for a similarly extended period.

•Exchange short-term bonds in its portfolio for longer-term ones to further lower interest rates for mortgages and other loans.

•Cut the interest rate on reserves that banks keep at the Fed to encourage them to lend more. The rate is already 0.25%. "I don't think (the current rate) is causing banks not to lend," DeQuadros says.

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