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During his final press conference as chairman, Fed Chairman Ben Bernanke cited progress made over the past twelve months, but left the door open to further changes.
December 18 -
Top Federal Reserve Board officials appear to have reached a consensus on how to deal with the "too big to fail" dilemma: wait for the current reform process to play out, but be ready to significantly increase capital standards if the problem remains unsolved.
May 14
WASHINGTON Federal Reserve Board Chairman Ben Bernanke said Friday that the headwinds that have until now slowed down the U.S. recovery may be lessening, offering a positive signal the economy is likely to improve this year.
"Near-term fiscal policy at the federal level remains restrictive, but the degree of restraint on economic growth seems less likely to lessen somewhat in 2014 and even more so in 2015; meanwhile, the budgetary situations of state and local governments have improved, reducing the need for further sharp cuts," said Bernanke, speaking at the annual meeting of the American Economic Association in Philadelphia.
Adding to that, the housing market has improved with home prices rebounding and higher mortgage rates, he said. Families also have strengthened their household balance sheets with improved incomes and are carrying less debt.
"The combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters," said Bernanke.
Looking ahead, Bernanke said economists including the Fed should be cautious in formulating forecasts.
The outgoing chairman, whose term expires on Jan. 31, said the U.S. recovery is slightly ahead of other countries, but that there was still reason to be cautiously optimistic about improvements abroad.
Like the U.S., other central banks around the world have taken steps to improve their financial system and provide policy accommodation.
"Financial-sector reform is proceeding, and the contractionary effects of tight fiscal policies are waning," said Bernanke. "Although difficult reforms--such as banking and fiscal reform in Europe and structural reform in Japan--are still in early stages, we have also seen indications of better growth in the advanced economies, which should have positive implications for the United States."
Despite the unprecedented steps taken by the Fed to boost the economy with its quantitative easing program and lowering interest rates to historic lows, Bernanke said there had been a number of factors that made it more challenging to get the economy running again.
Listing the reasons for a slow recovery, he cited the impact of the financial crisis, struggling housing and mortgage markets, low productivity growth, events outside of the U.S. in Europe and Japan and one other "significant factor:" fiscal policy.
Tax increases and spending cuts, he said, likely lowered growth in 2013 by as much as 1.5 percentage points. Adding to it, state and local government budgets had also been "highly contractionary" due to sharply declining tax revenues.
Bernanke, who has previously warned of the negative impact of tight near-term fiscal policies, said such an approach has likely been "counterproductive" to the recovery effort.
"Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be," said Bernanke.
That has been made even more difficult by the fact that interest rates are currently at such low levels.
"Monetary policy has less room to maneuver when interest rates are close to zero, while expansionary fiscal policy is likely both more effective and less costly in terms of increased debt burden when interest rates are pinned at low levels," he said.
