July 21st, 2010
04:52 PM ET
4 years ago

Greenspan's 'irrational exuberance' now Bernanke's 'unusually uncertain'

Federal Reserve Chairman Ben Bernanke is warning Congress that the economic outlook remains 'unusually uncertain.'
Federal Reserve Chairman Ben Bernanke is warning Congress that the economic outlook remains 'unusually uncertain.'

Washington (CNN) - Federal Reserve Chairman Ben Bernanke is warning Congress that the economic outlook remains "unusually uncertain," although he says the Fed is planning for the ultimate withdrawal of the substantial funds it has injected into the financial system since the onset of the economic crisis in 2008.

After Bernanke's statement before a Senate committee Wednesday, stocks turned sharply lower, with the Dow Jones industrial average down more than 100 points.

In prepared testimony for the Fed's semiannual report on monetary policy, Bernanke emphasizes more than once that economic conditions are likely to keep its short-term interest rates at "exceptionally low levels ... for an extended period," explaining that inflation is likely to remain low for several years. At the same time, he offered the most extensive look yet at the Fed's plans and options for pulling money out of the system and raising short-term rates, as the economy improves.

Bernanke says that he and other top Federal Reserve officials expect "continued moderate growth, a gradual decline in the unemployment rate, and subdued inflation over the next several years." However, the Fed chairman says that unemployment will drop more slowly than was predicted earlier this year.

Bernanke says that most of his colleagues on the Federal Open Market Committee, which sets interest rates and other aspects of the Fed's monetary policy, expect annual growth of 3 to 3.5 percent in 2010, and a slightly higher rate of 3.5 to 4.5 percent in 2011 and 2012. But while not mentioning the possibility of a double-dip recession, they also see the risks for growth as "weighted to the downside."

The chairman says most market committee members expect the unemployment rate to decline to between 7 and 7.5 percent by the end of 2012.

Bernanke says that although consumer spending appears to have expanded at a real rate of 2.5 percent in the first half of 2010, he stresses that an "important drag on household spending" is the slow recovery of the labor markets. He says "in all likelihood, a significant amount of time will be required to restore the nearly 8.5 million jobs that were lost over 2008 and 2009." And he emphasizes the "exceptional near-term hardships" on workers and their families now taking place, as well as the potential erosion of skills and possible long-lasting effects on employment and earnings prospects.

One other factor underlying the weaker outlook, says Bernanke, is that although financial conditions have improved significantly, they have become "less supportive of economic growth in recent months." He cites the situation in Europe as one contributing factor, but says that temporary swap lines with the European Central Bank and other entities have helped maintain credit availability in the United States.

Bernanke also laid out some of the alternatives to reducing the Fed's balance sheet from its current $2 trillion to a more normal level, but doesn't indicate that this will be a rapid process.

One approach is to continue to gradually reduce the holdings of mortgage-backed securities by not reinvesting prepayment and interest income. This could also be done for treasury-backed securities. Also, the Fed envisions shifting its holdings of treasuries to bonds of shorter maturities.

The chairman also says that selling off some holdings of mortgage-backed securities and other agency securities will be an essential, although eventual, method of shrinking its balance sheet. But he stressed that because such changes could affect financial conditions, any sales would be based on the Federal Open Market Committee evaluation of economic conditions.

Finally, Bernanke made it clear that one tool that the Fed will use to raise interest rates, when the time comes, is raising the interest rate it pays on the reserve balances that banks are required to keep on deposit with the Fed. Bernanke says that the Fed may drain excess reserves at the same time it raises short-term rates.


Filed under: Ben Bernanke • Congress • Federal Reserve • issues
soundoff (26 Responses)
  1. Wil in L.A.

    Allow anyone with a retirement account (IRA, 401k, etc) to a one-time withdrawal of up to $10,000 without taxes, fees, or penalties. This will get the nation going.

    July 21, 2010 04:56 pm at 4:56 pm |
  2. Dutch/Bad Newz, VA

    If Mr. Bernanke would've kept his darn mouth shut he could've prevented the downturn in stocks today. Geesh. Wall Street was already nervous about reform. I guess today was the day to lay out all the good, the bad and the ugly.

    July 21, 2010 04:57 pm at 4:57 pm |
  3. Orlando Patriot

    This is not a surprise for anyone that studies history and the applicable economies. Remember, FDR CREATED the great depression by initiating the New Deal causing an economic decline never seen before that lasted for 10 years. Now we elect Obama who is pushing through significantly more "New Deal" types of policies than FDR could have dreamed of.

    Guess what? Two years into the Obama administration unemployment has INCREASED more than 2% and INCREASED the national debt by almost 3 TRILLION DOLLARS (that's right: Trillion with a "T"). And Obama is just getting started!! Wait until the Health Care reform, Financial Reform, end of Bush Tax cuts, etc. actually goes into effect. No reason to look for a job because there will be NO BUSINESSES LEFT!!

    We now have the Fed Chairman admitting in his speech that the "recovery" could be 10 years. Sound familiar? To think that all we had to do to grow this economy is to NOT do what caused the first great depression but Obama is not smart enough to see that. Thanks Obama for the 2nd Great Depression.

    July 21, 2010 05:13 pm at 5:13 pm |
  4. Kent

    The current administration has no Idea about how business & the economy operate. Just keep taxing business is their Idea.

    July 21, 2010 05:13 pm at 5:13 pm |
  5. Darth Vadik, CA

    Trickle down economics mu butt...so much for the Republican "Free Market" BS idea.

    the only thing that trickles down from the rich on to the rest of us is the contempt, feces, and BS

    July 21, 2010 05:15 pm at 5:15 pm |
  6. Dominican mama 4 Obama

    @ Fair is Fair:

    It seems to be the week for apologies, and you, fair lady, have mine.

    July 21, 2010 05:17 pm at 5:17 pm |
  7. ib

    all this out of controll spending is catching up. How's that for Change for ya.

    July 21, 2010 05:31 pm at 5:31 pm |
  8. Regime change

    Yes, the economy is uncertain. Why? Because the Obama and the crazy super majority in Congress keep creating/passing idiotic bills and budgets (ie. insurance and financial 'reform' and the fake stimulus).

    The private sector funds the government. The more the government spends, the less there is for jobs, investments and savings.

    Until Obama and Pelosi stop pushing there crazy economy-killing policies, uncertainty with reign.

    July 21, 2010 05:40 pm at 5:40 pm |
  9. Four and The Door

    The chairman says most market committee members expect the unemployment rate to decline to between 7 and 7.5 percent by the end of 2012.
    ___________________________________________________
    The Obama Administration and Congress are working diligently to make sure that unemployment remains above 9%. They have instituted a variety of legislation including ObamaCare, Wall Street Reform and extended unemployment insurance that will be very effective at keeping unemployment at record high levels.

    July 21, 2010 05:45 pm at 5:45 pm |
  10. Shibumi

    @ Dutch....The truth is always painful to liberals. Hopey Changey, Hopey Changey!!!! Keep living in your fairy tale land.

    July 21, 2010 05:45 pm at 5:45 pm |
  11. normajean

    This comment doesn't belong here but...no choice. Once and for all I must say to the writers who continue to call the president names and belittle him in their own childish way, THIS SAYS MORE ABOUT YOU AND YOU'RE LACK OF INTELLEGENCE THAN IT DOES ABOUT OUR PRESIDENT. I f you don't like him, that's your privilege but when you take up a whole column that a six year old could write better, I think it's time you give up.Half the stuff you people write borders on slander, but that isn/t punishable here. The rest of us have our opinions and we try to keep them at least adult and with substance. Try reading some, you might learn something{That is if you can read,or does mommie read to you?}

    July 21, 2010 05:46 pm at 5:46 pm |
  12. American Patriot - a "real" tea partier

    If Bush and his bunch had paid attention and done something to stop the downturn, we wouldn't be in the mess we're in. At least President Obama is trying to turn things around. I wish he could do it overnight, but it took Bush's 8 years of mismanagement to get us into these dire straits. There's no way it can be fixed quickly.

    July 21, 2010 05:46 pm at 5:46 pm |
  13. normajean

    My comment about other writers has nothing to do with Mr. Bernanke.. I am intellegent enough to admit that the economic phase of our problems leaves me scratching my head, so I will not try to comment. Thanx.

    July 21, 2010 05:49 pm at 5:49 pm |
  14. Hugo

    Darth, you sound like your entire dribble is based upon wealth envy. If people with money invest and create commerce opportunities then other people can create commerce opportunities for themselves. Money doesn't move up the chain, it comes from someone making an investment in an idea. I agree that there are many in America that have more than they could ever spend in a lifetime. If you checked out Oprah, she started with nothing, if you checked out Bill Gates he started with nothing, it is hard work and perseverance that get you there. It isn't just GOP candidates that milk the system for monetary gain my man, check out the Clintons or the Dodds or Tom Daschle.

    July 21, 2010 05:54 pm at 5:54 pm |
  15. gatortarian

    End the Fed.

    July 21, 2010 05:55 pm at 5:55 pm |
  16. JR

    The one and only way to fix a recession is to spend more, by putting money directly to people who are out of the market, middle class and poor people. We are in recession because a large number of people are now off the market system because of the deterioration of their power purchase.
    Thus you must to bring them back in order to boost the economy, in order to boost the "CAPITALISM".
    Please, give money to people who couldn't have it right now, including unemployed, new graduate students from college who couldn't find job yet, people who have been out of job and are not illegible for the actual job benefit, and so on.
    Fixing the economy is fare more important than fixing the DEFICIT. It is absolutely no sense and ignorance to worry about "our children will pay for this".
    Guess what, they won't have to. No one will force them like slaves to pay for that. They will pay only what they can. They rest just pass on like we might do.
    Our children will prefer us, their parents, to be fine too. So keep spending in the right way, to bring our economy back.

    July 21, 2010 05:57 pm at 5:57 pm |
  17. one

    so glad he stopped by to give a speech. The market went down over 100 points by the time he was through. God help this country, evey day this place gets worse.

    July 21, 2010 05:59 pm at 5:59 pm |
  18. Lori in St Pete

    The economic recovery isn't going as great as everyone would like to to be going, but consider how bad things would have gotten if the also-rans had won:

    Remember in spring 2008 when Grumpy McSenile was telling auto workers and others in manufacturing jobs that he supported even MORE free trade taking jobs overseas, and that their jobs were gone and not coming back?

    Remember in October 2008 when Grumpy McSenile said that the "fundamentals of the economy are strong", and a few days later the wheels came off the economy as we were going over the cliff?

    Yeah, things could be so much worse.

    July 21, 2010 06:01 pm at 6:01 pm |
  19. welches, oregon

    you know at this point, I don't even care who is "in power". I just want
    "SOMEONE – ANYONE" to help things get better for all American People.

    July 21, 2010 06:04 pm at 6:04 pm |
  20. Henry Miller, Libertarian

    Yeah, but who can trust the Fed?

    That's the problem with any organisation that keeps secrets.

    July 21, 2010 06:22 pm at 6:22 pm |
  21. thor

    The economic downturn started when the DEMS took control of Congress in 2006. Check it out !!!

    July 21, 2010 06:27 pm at 6:27 pm |
  22. guy from NM

    Unusually??? Where has he been for the past few years? He is one of the party responsible for this disaster, being very friendly to Wall Street.

    July 21, 2010 06:46 pm at 6:46 pm |
  23. Poser

    It's amazing the same people keep spouting the same false Faux News talking points even when faced with facts. The Obama administration or any of it's policies did not start the recession. The recession started in 2007 (remember the first Bush stimulus checks?) and got dramatically worse in 2008 when the banking system nearly collapsed. That was long before President Obama was in office. When President Obama took office, we had lost 3 million jobs and were losing jobs at a rate of 750,000 per month. At that point in time, unemployment was not only bad but bad and RISING. Of course the numbers went up. Today, rather than 750,000 jobs per month being lost, we're gaining some.
    Part of the problem is low consumer confidence because we have a right wing media machine telling people it's gotten worse despite the facts that demonstrate the economy is growing again.
    One other thing: Tax cuts for the wealthy increase deficits and don't create jobs (at least not here in the US). I think the economy from 2000-2008 shows that pretty clearly.

    July 21, 2010 07:08 pm at 7:08 pm |
  24. Victim of GOP Taliban

    Obama should have fired him while he had the chance. Not so sure about a man that presided over the Fed during the worst meltdown since the Great Depression.

    July 21, 2010 07:35 pm at 7:35 pm |
  25. Jim

    Its obvious that we need to show more resolve to confront deflation. We need more stimulus but not the tax cut kind. We need to invest in infrastructure improvents around the country in a much bigger way.

    BTW, voting Republican this fall will result in a greater deficit as they plan to cut taxes for the rich without cutting anything from the budget.

    July 21, 2010 07:40 pm at 7:40 pm |
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