The economy is growing--but not as fast as Ben Bernanke would like.
In delivering his semiannual monetary report before a Senate panel, the Federal Reserve chairman said that in light of recent disappointing economic data, the Fed’s economic growth projections were lower than predicted earlier in the year.
The Fed now estimates that economic growth for the rest of 2012 will be between 1.9% to 2.4%, and as high as 2.8% next year, he said.
Bernanke said he was not troubled about inflation, calling the risk “relatively low now.”
But his testimony was particularly grim regarding employment. While the Fed anticipates jobs will continue to be added to the economy, the rate of job growth is likely to be below the rate of new entries to the labor force, meaning employment growth will be “frustratingly slow.”
Earlier this month, the Department of Labor announced disappointing job growth in May and said the unemployment rate was flat.
Worries Over Fiscal Cliff
Bernanke also discussed the so-called fiscal cliff--the tax increases and spending cuts set to kick in at the end of 2012 if Congress fails to reach another budget compromise--and warned that a failure to reach a resolution could be potentially disastrous for the economy.
“If the fiscal cliff is allowed to happen, it will have certain negative effects on the economy,” Bernanke said.
While Bernanke said that current fiscal policy is unsustainable in the long term, he cautioned against a drastic decrease in federal spending, which he said would hurt the economy and drag down job growth.
“The most effective way that Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery,” Bernanke said.
He estimated that approximately 1.25 million fewer jobs could be created next year if the fiscal cliff goes into effect.
In questioning, Sen. Bob Corker (R-Tennessee) sounded dismayed with Bernanke's urging against large fiscal spending cuts. Corker suggested that delaying cuts would be “irresponsible” and “kicking the can down the road.”
Earlier on Tuesday, the Department of Labor announced that the Consumer Price Index remained unchanged in June, with decreases in gasoline prices offset by price increases for other items. Year over year, the CPI increased 1.7% in June, below the 2% benchmark the Fed considers a healthy rate of inflation.
Bernanke's testimony also came amid growing global economic concerns, after the IMF downgraded its forecasts for U.K. economic growth.