Fed boss Ben Bernanke fails to signal more stimulus for 'fragile' American economy

 

The chairman of the Federal Reserve, Ben Bernanke, yesterday disappointed many in the financial markets by offering no hint that the US central bank is preparing more monetary stimulus.

Giving testimony before Congress, Mr Bernanke said growth in the world's largest economy had slowed and that progress in reducing unemployment, which stands at 8.2 per cent, would be "frustratingly low". He also said that the Fed is "prepared to take further action as appropriate" in order to support the US economy.

But Mr Bernanke failed to spell out what form that action could take, failing to mention the possibility of more quantitative easing.

"Stimulus junkies wanted a clear sign of QE," said Joe Saluzzi of Themis Trading. "They didn't get it and the market dropped."

Yet other analysts said more asset purchases by the US central bank might yet materialise.

"Bernanke may just be playing for time and it's possible that he wasn't keen to discuss the prospects for QE3 with a potentially hostile audience," said Paul Ashworth, chief US Economist of Capital Economics.

Speculation has been growing that the Fed will ease monetary policy after the Chinese and European central banks cut interest rates earlier this month and the Bank of England increased its own bond buying scheme by £50bn.

Mr Bernanke said that recent data points to an annualised growth rate in the US of less than two per cent in the second quarter of 2012.

"Households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low," he said. "Forward-looking indicators of investment demand – such as surveys of business conditions and capital-spending plans – suggest further weakness ahead."

Mr Bernanke was also questioned over the looming US "fiscal cliff", whereby fiscal policy will be automatically tightened by four per cent of GDP next year unless Democrat and Republican legislators can agree on a budget consolidation programme.

The Fed chairman warned that these spending cuts and tax rises would push America into a "shallow recession" and urged legislators to reach a compromise.

He said: "Fiscal conditions decisions should take into account the fragility of the recovery. The most effective way that the Congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery."

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