Bernanke: Monetary policy not a ‘panacea’ for jobs, economic growth

Federal Reserve Chairman Ben Bernanke signaled Tuesday that the central bank’ s controversial buying of Treasury bonds is coming to an end.

This could come as a blow to President Obama, whose administration has argued that stimulus from the administration and Fed have helped to prevent an even worse recession. Obama’ s approval ratings and perhaps his chances for reelection have weakened recently amid signs the economy is teetering on the brink of another downturn.

{mosads}Bernanke conceded that the economic recovery was “frustratingly slow” but did not hint at a new round of quantitative easing, the name given to the Fed’s efforts to lower lending rates and spur business. The second round of the program is scheduled to end this month.

During an address in Atlanta, Bernanke did say the Fed would keep interest rates bottomed out for “an extended period.”

The remarks were Bernanke’s first public comments since the Bureau of Labor Statistics reported Friday that the economy added only 54,000 jobs in May, well below already tempered expectations.

That disappointing report capped off several consecutive weeks of underwhelming economic data, including new housing figures that showed home prices falling another 4 percent. 

Both the Dow Jones Industrial Average and the Standard & Poor’s 500 index dropped as Bernanke spoke, driving them into slightly negative territory as the day’s trading ended midway through the speech. The Dow closed down about 19 points, while the S&P fell a little over one point.

The economic news has shifted the political dynamic in Washington and raised the stakes of negotiations to lower deficits and increase the country’s borrowing limits. Business leaders and Wall Street analysts have raised alarm that a failure to increase the debt limit could hurt the economy even as others suggest a failure to get spending under control could slow job growth.

Obama on Tuesday called the economic recovery “uneven,” but said the “overall trend” was positive. 

“I’m not concerned about a double-dip recession,” Obama said in remarks at a press conference with German Chancellor Angela Merkel. “I am concerned about the fact that the recovery that we’re on is not producing jobs as fast as I want it to happen.”

Bernanke warned that the central bank could not solve the country’s economic problems. 

“Monetary policy cannot be a panacea,” said Bernanke, who acknowledged “headwinds” facing the economy but said the Fed cannot pursue irresponsible policies. 

“Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established,” he said. “At the same time, the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability.”

Bernanke described the labor market as “far from normal” and “quite weak,” but also said the jobs market had “seen signs of gradual improvement.” He noted that the private sector has added on average 180,000 jobs a month over the last five months — compared to fewer than 140,000 in the last four months of 2010.

The spate of bleak economic news led to speculation that the Fed might be open to a third round of quantitative easing. It embarked on a second round last year, and is slated to wrap up the $600 billion of purchases at the end of June.

Proponents of QE2 contend the unorthodox move helped stave off growing concern at the Fed over price deflation, but critics, including many congressional Republicans, argued Bernanke risked inflation that would hurt consumers and weaken the dollar. 

House Budget Committee Chairman Paul Ryan (R-Wis.) aired his concerns to Bernanke when he appeared before his panel in February.

“There is nothing more insidious that a country can do to its citizens than debase its currency,” Ryan said. “My concern is that the costs of the Fed’s current monetary policy — the money creation and massive balance sheet expansion — will come to outweigh the perceived short-term benefits.”

Both Obama and Bernanke noted that the economy was still working to recover from the worst financial crisis since the Great Depression, and at times they used the same words. Both referred to the “headwinds” slowing the recovery.

Dallas Federal Reserve President Richard Fisher preceded Bernanke’s speech by arguing that quantitative easing had done as much as it could for the economy. 

“What would more liquidity do? It’s not being used,” he said in a CNBC interview. “The gas tanks are full.”

Fisher is a voting member of the Federal Open Market Committee, which sets interest rates and makes decisions about the Fed’s quantitative easing efforts.

Dennis Lockhart, president of the Atlanta Federal Reserve Bank, admitted frustration about the state of the economy, but also stopped short of calling for the Fed to try and come to the rescue. 

Speaking to the Charlotte Economics Club, he said it would take a “serious reversal of the growth picture” and even more unemployment for the Fed to think about even more extreme monetary policy moves.

Sam Youngman contributed to this report.

This story was posted at 4:07 and updated at 5:43 p.m. and at 8:38 p.m.