Federal Reserve Chairman Ben Bernanke said today that the weakened state of the U.S. economy is attributable, in large part, to the dysfunctional process by which the nation’s lawgivers make fiscal decisions.
“The quality of economic policy-making in the United States will heavily influence the nation’s long term prospects,” he told an audience of central bankers, economists and academics attending an economics conference in Jackson Hole, Wyo., hosted annually by the Federal Reserve Bank of Kansas City.
The Fed chief’s remarks were much anticipated by the financial communities here and abroad, which wondered whether Bernanke would offer a hint of a major new Fed initiative, as he did at last year’s conference.
But there was no such hint today, which signaled to conference attendees that there will be no third round of bond-buying by the Fed, which purchased more than $2.5 trillion in longer term securities during two previous rounds of “quantitative easing,” the most recent of which ended this past June.
Despite the continued softness of the U.S. economy – evidenced by a government report today estimating the nation’s GDP grew at annual rate of just 1 percent in the second, a downward adjustment from an initial estimate of 1.3 percent – Bernanke said he is “optimistic” about the economy.
“Notwithstanding the severe difficulties we currently face,” he said, “I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if – and I stress if – our country takes the necessary steps to secure that outcome.”
What concerns the Fed chief, he said, is that, “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” He said that the Fed has done just about all it can to strengthen the economy using its power over monetary policy and that fiscal policy, controlled by Congress and the White House, will shape America’s economic future in the years to come.
Bernanke renewed his call to both the White House and Congress for long-term debt reduction, without short-term spending cuts or tax increases that might have a damping effect on economic recovery. He also advocated a “good, proactive housing policy.”
The financial markets responded favorably to the Fed chief’s Jackson Hole keynoter. After falling 215 points yesterday, the Dow Jones Industrial Average was up 125 points at the close today.