Bernanke: Fed Ready to Take More Action, if Needed
U.S. stock markets took a bearish view of Bernanke's testimony, at least initially, with the Dow dropping 100 points in minutes. The Nasdaq plunged 30 points and the S&P 500 fell 10 points. At one point, the Dow was down more 150 points.
"Of course, even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain," Bernanke said, in prepared testimony. "We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability."
Moderate Grow, Slow-Healing Labor Market
Bernanke reiterated the Fed's most recent economic forecast, which forecasts moderate growth, low inflation and a labor market that will probably require a significant amount of time "to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009."
However, beyond the Fed chair's statement that the Fed remains prepared to take further actions as warranted, Bernanke's testimony took on a more hawkish tone, and the U.S. stock market's reaction reflected that.
Notably, Bernanke did not address the possible elimination the 0.25% interest rate the Fed pays on excess reserves, as an additional effort to increase bank incentives to make more loans.
Likewise, the statement did not contain the announcement of a new credit facility -- or the increase in size of an existing facility -- to help increase bank lending to small-sized/medium-sized businesses.
Although Bernanke said "at the Federal Reserve, we have been working to facilitate the flow of funds to creditworthy small businesses," some businesses and economists may view that as not doing enough to increase credit to organizations that are responsible for the majority of private-sector hiring in the United States.
Meanwhile, in the event that the U.S. economic recovery unexpectedly accelerates with an accompanying rise in inflation, Bernanke said the Fed's unwinding of quantitative easing could include, among other options, reinvesting maturing Treasuries into short-term investments, selling mortgage-backed debt, or raising interest rates on bank deposits held by the Fed.
In sum, Bernanke's testimony paints the picture of a Fed that senses that U.S. economic growth is not strong enough and where it wants it to be, but at this juncture it's not convinced yet that additional monetary action will be needed to achieve that stronger growth.