Economy: Fed Says U.S. ‘Close to Faltering’



Bernanke warns of slow recovery, recommends QE

Bernanke warns of slow recovery, recommends QE

Ben Bernanke, Chairman of the US Federal Reserve, said in front of Congress that the US economy is “close to faltering” and that the Federal Reserve is “prepared to take further action as appropriate” to help the recovery.

This comes after the Fed has already taken up $400bn in recovery measures, by shifting that money into long-term government debt.

Bernanke said that the move into long-term government debt, called Operation Twist, was “meaningful, but not an enormous support to the economy.” It netted about a half-percentage point cut in interest rates.

He also warned that the eurozone debt crisis and hasty government cuts run the risk of weakening the recovery further.

When asked about the eurozone crisis, Bernanke said there was little for the US to do. He called the US an “innocent bystander” in the crisis, as the country has limited exposure to Greek debt should the country default. The real issue, he said, is the potential for the situation in Greece to trigger a run on other eurozone banking sectors, which would hurt the US badly.

Fed Policies

Bernanke offered three familiar talking points on possible Federal Reserve action should the economy continue to weaken.

This includes being clearer about how long interest rates will continue to be held down and increasing quantitative easing such as purchasing US government bonds and debts.

He also said it may be appropriate to lower interest rates paid on cash that banks hold at the Fed, but warned that none of these policies were a cure-all or flawless recipe for recovery.

Yuan Controversy

Bernanke also spoke out in support of people against Chinese purchasing of US debt, as this holds down the yuan’s value and gives China a more competitive edge.

“Chinese policy is blocking what might be a more normal recovery process in the global economy,” Bernanke said, adding that such a competitive currency is driving demand away from the US.

This comes as the US Senate begins reviewing a bill that would force the yuan to appreciate, hurting China and other countries thought to be holding their currencies at an artificially low level.

 

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