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Bernanke: Economic head winds 'may be stronger than we thought'

Federal Reserve Chairman Ben S. Bernanke's news conference Wednesday wasn’t much of a confidence-builder for stock market bulls.

As part of his presentation, Bernanke reported the Fed’s revised forecasts for economic growth, unemployment and inflation in 2011 and 2012. From a bull’s standpoint, they were “all heading in the wrong direction,” said Alan Ruskin, a currency strategist at Deutsche Bank Securities in New York.

That didn’t help the market’s mood after four days of gains. The Dow Jones industrial average lost 80.34 points, or 0.7%, to close at 12,109.67, taking back about a quarter of its advance over the last four sessions.

Benb622 The Fed’s “central tendency” projection for real gross domestic product growth in 2011 was revised to a range of 2.7% to 2.9%, down from the bank’s expectation of 3.1% to 3.3% in April.

The unemployment rate for 2011 was revised to a range of 8.6% to 8.9% from 8.4% to 8.7%.

“Core” inflation (excluding food and energy costs) was boosted to a range of 1.5% to 1.8% from 1.3% to 1.6%.

For 2012, the Fed revised its GDP growth estimate down to a range of 3.3% to 3.7% from the previous estimate of 3.5% to 4.2%.

A reporter asked Bernanke how the growth-rate cuts for 2012 jibed with the Fed’s official post-meeting statement Wednesday, which attributed the economy’s slowdown this year to “in part factors that are likely to be temporary,” such as manufacturing disruptions after Japan’s March earthquake.

Bernanke’s response:

What we say is that the temporary factors are in part the reason for the slowdown. In other words, part of the slowdown is temporary, and part of it may be longer-lasting.

We do believe that growth is going to pick up going into 2012 but at a somewhat slower pace than what we had anticipated in April. We don’t have a precise read on why this slower pace of growth is persisting.

One way to think about it is that maybe some of the head winds that have been concerning us, like, you know, weakness in the financial sector, problems in the housing sector, balance sheets and deleveraging issues, some of these head winds may be stronger or more persistent than we thought.

So for the time being the Fed pledged to keep short-term interest rates near zero. But Bernanke also indicated the Fed had no other economic stimulus programs on the table as it wraps up its $600-billion Treasury-bond-buying program launched last November.

Given the Fed’s own confusion as to “how much of the slowdown is temporary and how much is permanent,” Bernanke said, “That would suggest, all else equal, that a little bit of time to see what’s going to happen would be useful in making policy decisions.”

In other words, if stock bulls are holding out hope for another shot of stimulus to boost growth, they’re going to keep waiting.

-- Tom Petruno

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Judging the Fed: Key market and economic indicators now versus last November

Photo: Fed Chairman Ben S. Bernanke. Credit: Jim Watson / AFP / Getty Images

 
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