Bernanke: Congress must act
Recession likely without an agreement
WASHINGTON — Federal Reserve Chairman Ben Bernanke painted a dark picture of where the U.S. economy is headed if Congress fails to reach agreement soon to avert a budget crisis.
“It would probably knock the recovery back into a recession and cost a lot of jobs, and would greatly delay the recovery that we’re hoping to facilitate,” Bernanke said at the end of two hours of testimony Tuesday before the Senate Banking Committee.
But Bernanke said lawmakers must go beyond the year-end issues and come up with a plan to shrink the budget deficit.
Otherwise, the United States could suffer a financial crisis marked by rising interest rates.
“We might face ... a financial crisis where interest rates would rise, as we’re seeing now in Europe and that would feed through to other interest rates like mortgages and other kinds of rates. And it would be very costly to our economy,” he said.
Bernanke was giving his midyear report on the state of the economy. And that wasn’t pretty either. It’s growing modestly but has weakened in recent months, he said. Job growth has slumped, manufacturing has weakened and consumers have lost confidence and have cut back on spending.
The Fed is prepared to take further action if growth doesn’t improve. Bernanke provided no clues about what steps the Fed might take or whether any action was imminent.
His report was being made as separate reports U.S. industrial production, homebuilder confidence and consumer prices came out Tuesday:
INDUSTRIAL PRODUCTION: Production rose in June as factories made more cars, machines and business equipment, the Federal Reserve said Tuesday. Factory output recovered to levels reached earlier this spring but appears to be leveling off.
Analysts say the U.S. manufacturing sector is struggling to mount a sustained recovery after three months of slow growth.
Factory output rose 0.7 percent last month, after falling by the same amount in May, the Fed said.
HOMEBUILDER CONFIDENCE: Confidence among U.S. homebuilders is swelling to a five-year high, with many anticipating that sales of new homes will strengthen this year even as signs point to a slowing economy.
The National Association of Home Builders/Wells Fargo builder sentiment index surged six points this month to 35, the highest reading since March 2007, the trade association said Tuesday. Still, any reading below 50 indicates negative sentiment about the housing market. And the index hasn’t reached that level since April 2006, the peak of the housing boom.
Even so, the latest builder survey, based on responses from 318 builders, reflects growing optimism among builders that new home sales are on an upswing again after hitting the lowest point in a half century last year.
In July, builders say they observed the best sales levels since February 2007. Their outlook for sales in the next six months brightened to the highest level since March 2007.
CONSUMER PRICES: Consumer prices were unchanged in June, held down by cheaper gasoline. Weak economic growth is limiting the ability of companies to raise prices. The tame inflation was underscored by a 0.2 percent drop in consumer prices for the April-June period as a whole. That was the first quarterly drop in consumer prices in two years.
In his congressional comments, Bernanke noted that there is only so much the Fed can do for the weak economy.
If Congress doesn’t take action by the end of the year, a package of tax cuts adopted during George W. Bush’s administration will expire while deep spending cuts kick in. If that happens, the economy would go over a “fiscal cliff.”
Congress would help the economy by resolving the issue well before the year ends. “Doing so would help reduce uncertainty and boost household and business confidence,” he said.
An election-year standoff has immobilized Congress.
Bernanke stopped short of telling Congress how to proceed. He challenged them to think broadly. “Congress is in charge here, not the Federal Reserve,” he said.