Bernanke gives no hint of new stimulus

The chairman of the U.S. Federal Reserve, Ben Bernanke, offered no signal Thursday that it was planning renewed economic stimulus, but promised the Fed was ready to act if the U.S. economy weakens.
Federal Reserve Chairman Ben Bernanke on Thursday didn't signal any action to stimulate the U.S. economy is imminent. (J. Scott Applewhite/Associated Press Press)

The chairman of the U.S. Federal Reserve, Ben Bernanke, offered no signal Thursday that it was planning renewed economic stimulus, but promised the Fed was ready to act if the U.S. economy weakens.

North American markets, which rose sharply yesterday, gave back their gains after his speech.

S&P/TSX composite index closed in the red, down 41.28 points at 11,592.12 after jumping about 300 points in the last two days. In New York, the Dow Jones industrial average was also off earlier highs of as much as 140 points, but still closed up 46.17 points at 12,460.96.

"All told," said Avery Shenfeld of CIBC World Markets in a commentary, "not really much meat here to give markets any new assurance that more Fed action is in fact on the way."

There had been speculation that the gain in shares had been based on the hope Bernanke would hint at renewed measures in his comments before the congressional Joint Economic Committee.

Instead, he called on lawmakers to adopt sustainable spending and taxation policies, but repeated his warnings against moving to make sharp reductions in the public deficit.

Stocks gave back their biggest gains after Federal Reserve Chairman Ben Bernanke's speech Thursday. (Richard Drew/Associated Press)

"Bernanke is saying simply, we'll act if we have to if we don't have to, we won't," said Allan Small, senior adviser at DWM Securities.

"I think that should be enough for these markets because that tells you that there's this backstop. That's the way I look at it, but the market wants the goods. But if (the Fed doesn't deliver), who knows if this is just a temporary bounce."

There had been speculation the Fed would embark on another program of bond-buying aimed at lowering interest rates to encourage consumption and investment by businesses.

Bernanke says it, "as always," was ready to act, but wasn't in a position to provide details before getting agreement at a full Fed monetary policy committee meeting. The next meeting is scheduled for June 19-20.

Economists note that U.S. long-term rates have already touched record lows. Even if rates did decline further, analysts say they might have little effect on the economy.

He says the European debt crisis poses significant risks to the U.S. financial markets. And he noted that U.S. unemployment remains high and the outlook for inflation subdued.

Bernanke may face pressure not to pursue further stimulus before the November U.S. election because such steps could be perceived as helping President Barack Obama win re-election.

Kevin Brady, a Republican representative from Texas, warned against more bond buying at the hearing. He said it could raise the risks of inflation.

"It is my belief that the Fed has done all that it can do and has perhaps done too much," Brady, the vice chairman of the committee, said.

On Wednesday, Janet Yellen, the vice chairman of the Fed, Dennis Lockhart, the head of the Atlanta regional Fed Bank, and John Williams, president of the San Francisco Fed bank, all expressed the view that the Fed may need to do more to provide support,

A bleaker view of the economy has taken hold in recent weeks, especially as hiring has weakened. U.S. employers added just 69,000 jobs in May, the fewest in a year. Since averaging a robust 252,000 a month from December through February, job growth has slowed to a lackluster 96,000 a month.

And the U.S. economy grew at a tepid annual rate of 1.9 per cent in the first three months of 2012.

Fears are also growing that a collapse of Europe's euro currency union could trigger a panic and perhaps cause a global recession.

The Fed's policy committee has been split between those who favor doing everything possible to strengthen the economy and reduce unemployment and those more concerned about inflation risks.

With files from The Canadian Press and The Associated Press