Ben Bernanke, chairman of the Federal Reserve, on Monday warned of a “considerable way to go” before the US economy made a full recovery, as he addressed the restraints on growth posed by the fiscal crisis among state and local governments.
In a speech in South Carolina, where he grew up, Mr Bernanke reiterated the Fed’s economic outlook of moderate expansion heading into its next interest rate-setting meeting, scheduled for next week.
“Today, the financial crisis appears to be mostly behind us, and the economy seems to have stabilised and is expanding again,” Mr Bernanke said. “But we have a considerable way to go to achieve a full recovery in our economy, and many Americans are still grappling with unemployment, foreclosure and lost savings.”
The pace of growth in the US economy slowed from an annualised rate of 3.7 per cent in the first quarter to 2.4 per cent in the second quarter, exacerbating concerns that the recovery had hit a rough patch. It has also added pressure on Fed monetary policymakers to consider bold steps to reboot the economy through a fresh round of easing. In his speech on Monday, Mr Bernanke did not address monetary policy.
The focus of Mr Bernanke’s remarks was the dire fiscal conditions among US state and local governments, which he said were “weighing on economic activity” as these entities cut back on spending and employment. And the Fed chairman warned that tough choices lay ahead for local politicians.
“With economic conditions still far from normal, state budgets will probably remain under substantial pressure for a while, leaving governors and legislatures a difficult juggling act as they try to maintain essential services while meeting their budgetary obligations,” Mr Bernanke said.
The Fed chairman said that state and local governments should consider boosting countercyclical fiscal measures such as “rainy day” funds, which would build a buffer during good economic times that could be used to protect state finances during recessions. He also warned that long-term fiscal issues such as unfunded pension and healthcare liabilities would have to be addressed aggressively at a local level but also at a federal level.
“To steer clear of sudden, sharp, and disruptive shifts in spending programs and tax policies, and to retain the confidence of the public and financial markets, federal policymakers need to develop a credible plan to restore fiscal sustainability,” he said.
Copyright The Financial Times Limited 2010
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