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U.S. Federal Reserve Chairman Says Economic Recovery In Doubt

U.S. Federal Reserve Chairman Ben Bernanke takes a brief morning break at the Grand Teton National Park on August 27.
The chairman of the Federal Reserve says the U.S. economy is not recovering as quickly as it had been expected to.

But Ben Bernanke said the Federal Reserve is prepared to step in and help spur growth in the economy if the news gets any worse.

Economic data released ahead of Bernanke's remarks, delivered on August 27 at an annual conference of global central bankers in Wyoming, made it clear that the U.S. economic recovery has slowed considerably.

The economy grew at just 1.6 percent in April, May, and June -- not the 2.4 percent the government had originally predicted, but also not as dismal as the 1.4 percent many economists had feared.

That's a big slowdown compared to the 3.7 percent growth rate recorded in the first three months of the year, and the 5 percent growth that happened in the last three months of 2009.

The latest economic data comes after a string of disappointing reports on U.S. employment, housing, and manufacturing.

Sales of existing homes in July fell to their lowest level in 10 years, and sales of new homes fell to their lowest level since the government began keeping records in 1963. Orders for large factory goods -- like refrigerators -- also dropped, indicating that the manufacturing industry is not rebounding as fast as had been hoped.

Bad News For Obama

The economic sluggishness is bad news for the White House and President Barack Obama, whose Democratic Party is facing tough congressional elections in early November.

Obama's own public approval ratings reflect the poor state of the economy. For months, polls have shown less than half of Americans approve of his performance as president. A new CBS News poll on August 20-24 found Obama's approval rating still stuck at 48 percent, with almost as many -- 44 percent -- disapproving.

The current U.S. unemployment rate is 9.6 percent and economists worry that it could climb even higher as companies react to the bad news and stop hiring new employees.

A Reuters poll from August 27 found deep pessimism among economists about how much the economy will grow in the third quarter. Fully 25 percent of those surveyed think the U.S. economy might enter a double-dip recession -- the term for an economic recovery that slows down so much it eventually becomes another recession.

In his remarks, Bernanke tried to strike an optimistic note by downplaying concerns that the economy might slip back into recession.

He said that while the exit from recession was driven primarily by fiscal and monetary stimulus measures and inventory rebuilding by businesses, a "handoff" to consumer demand appeared to be under way.

And he predicted a modest expansion in the second half of this year and a quicker pace of growth next year.

More Stimulus?

If that forecast is wrong, however, Bernanke said the Fed "is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly."

He suggested that the Federal Reserve could encourage growth by purchasing more government debt or by lowering the rate of interest paid on banks' excess reserves. Such interest rates have already been held at very low levels since December 2008.

Over the last 18 months, the Fed has pumped about $1.7 trillion into the economy in an effort to jump-start growth.

Bernanke said the Fed's previous decision to make a large-scale purchase of long-term securities had been effective in lowering borrowing costs and could be used again.

Global markets reacted positively to the news that the Fed might step in to prop up the world's largest economy.

Stocks rose in Europe and on Wall Street. Britain's stock exchange closed up 1 percent, the French stock market rose 0.8 percent, and Germany's rose 0.7 percent.

On Wall Street, the Dow Jones industrial average rose 160 points, or 1.6 percent, in late afternoon trading.

Meanwhile, Russia and Germany announced that they will cooperate in the effort to reform global financial markets.

German Finance Minister Wolfgang Schaeuble made the announcement during a meeting in Moscow with his Russian counterpart, Aleksei Kudrin.

Schaeuble also said the world's emerging economies should have a stronger voice in the International Monetary Fund's efforts to adjust to new economic realities in the wake of the world economic crisis.

He urged the world's 20 leading industrial and emerging economies, the G20, to come up with concrete results during their next summit in South Korea in November.

with agency material
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