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Federal Reserve Chairman Ben S. Bernanke said an agreement on ways to reduce long-term federal budget deficits could remove an impediment to growth, while failure to avoid the so-called fiscal cliff would pose a “substantial threat” to the recovery.
“There’s important potential for the economy to strengthen significantly if there’s a greater level of security and confidence about where we’re going,” he said today to the Economic Club of New York. “A plan for resolving the nation’s longer-term budgetary issues without harming the recovery could help make the new year a very good one for the American economy.”
Bernanke, 58, identified the threat of $607 billion in automatic tax increases and spending cuts set to take effect next year as one of the impediments to a faster expansion as companies hold back on hiring and investment. The Fed chief repeated his warning a failure to reach an agreement could send the economy “toppling back into recession.”
The central bank is buying $40 billion in housing debt each month and has pledged to keep its benchmark interest rate near zero through mid-2015 as it seeks to spur growth and reduce a 7.9 percent jobless rate.
“We’re going to do what we can to support ongoing recovery in growth and jobs and create the demand for output, the demand for firms’ products that will remove that uncertainty about the future sustainability of the recovery,” Bernanke said.
The yield on the 10-year Treasury note climbed to 1.67 percent from 1.61 percent as Bernanke’s comments suggested that a fiscal deal could remove impediments to growth. Stocks erased losses, with the Standard and Poor’s 500 Index advancing 0.1 percent to 1,387.82 at the close of trading in New York after losing as much as 0.7 percent.
“This is probably the most upbeat speech he has given, but it’s still guarded optimism,” said Harm Bandholz, chief U.S. economist at UniCredit Group in New York. “It’s still Bernanke. He has been so cautious about everything throughout the recovery.”
“Uncertainty” about the fiscal outlook “may be contributing to an increased sense of caution in financial markets, with adverse effects on the economy,” Bernanke said at the Marriott Marquis Hotel in Times Square.
Bernanke also said Fed policy will remain accommodative until the recovery is on a firmer footing. “We are not saying that we expect the economy to remain weak until mid-2015,” he said. “We want to be sure that the recovery is established before we begin to normalize policy.”
Some businesses are pulling back on concern that hurtling over the fiscal cliff will damage the economy. Spending on equipment and software was little changed from June through September, the weakest reading since the second quarter of 2009, according to figures from the Commerce Department.
Bernanke identified the slow recovery in housing, weakness in bank lending and the European debt crisis as additional headwinds to the recovery.
The Fed’s large-scale asset purchases have pumped up the balance sheet to $2.88 trillion, close to a record. The so- called quantitative easing has helped reduce borrowing costs and push down unemployment from a peak of 10 percent in October 2009. The Fed cut its target interest rate to zero in December 2008.
While monetary policy is “by no means a panacea for our economic ills,” Bernanke said, it has provided an “important offset to the headwinds that have slowed the cyclical recovery.” He said purchases of mortgage debt had pushed down borrowing costs, helping the housing market.
“Recently, the housing market has shown some clear signs of improvement, as home sales, prices, and construction have all moved up since early this year,” he said. “These developments are encouraging, and it seems likely that, on net, residential investment will be a source of economic growth and new jobs over the next couple of years.”
Record low mortgage rates have helped spur the revival. The average fixed rate on a 30-year home loan fell to 3.34 percent last week, the lowest in four decades of data, Freddie Mac data show.
New-home construction unexpectedly climbed to a four-year high in October, a report today showed.
Housing starts rose 3.6 percent to an 894,000 annual rate, the fastest since July 2008 and exceeding all estimates in a Bloomberg survey, according to Commerce Department figures. The median forecast of 82 economists called for an 840,000 pace. Permits for the construction of single-family homes also advanced to the highest in four years.
Sales of existing homes rose 2.1 percent in October, and the median price rose from a year earlier as inventories dropped to the lowest level in almost a decade, the National Association of Realtors said yesterday. The National Association of Home Builders/Wells Fargo index of builder confidence increased to a six-year high in October.
The housing recovery has boosted performance at Home Depot Inc. and Lowe’s Cos., the largest and second-largest U.S. home improvement retailers. Lowe’s surged the most in more than three years yesterday after fiscal third-quarter profit topped analysts’ estimates. Last week, Home Depot also posted third- quarter profit that topped analysts’ estimates.
Still, unemployment remains “well above both its level prior to the onset of the recession and the level that my colleagues and I think can be sustained once a full recovery has been achieved,” Bernanke said.
One gauge of unemployment -- which includes those who have given up searching for work and those who are employed part-time because they can’t find a full-time job -- stood at 14.6 percent in October.
Long-term unemployment has also remained elevated throughout the recovery. Among the unemployed, 40.6 percent have been without work for 27 weeks or longer.
Bernanke didn’t explicitly address what the Fed might do after the expiration of Operation Twist in December. Under that program, The Fed is purchasing about $45 billion a month of longer-term Treasury securities as it replaces the same amount of short-term debt on its balance sheet.
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