Ben Bernanke is ending his tenure as Federal Reserve chairman with an upbeat assessment for the US and global economy, declaring "some grounds for cautious optimism" for both advanced and emerging economies around the world.
In what is likely to be his last big policy speech before handing over the reins of the US central bank to Janet Yellen next month, Mr Bernanke said difficult reforms in Europe and Japan were "still in early stages" but "we have also seen indications of better growth".
The Fed chairman noted that "emerging market economies had also grown somewhat more quickly lately after a slowing in the first half of 2013" but he warned that the "extent and effectiveness" of reforms would be "critical", citing China and Mexico as examples.
Mr Bernanke said that the US recovery “clearly remains incomplete” with unemployment still at 7 per cent. But he said that headwinds afflicting the world’s biggest economy in recent years – from the effects of the financial crisis and the woes of the housing market to low productivity growth, the eurozone crisis and US fiscal dysfunction – could “now be abating”.
“The combination of financial healing, greater balance in the housing market, less fiscal restraint and, of course, continued monetary policy accommodation bodes well for US economic growth in coming quarters,” Mr Bernanke said.
In light of the improved economic prospects, the Fed last month began to reduce, or taper, the scale of the asset purchases it has used to prop up the US economy from $85 billion a month to $75 billion. By the end of this year, assuming continued economic improvement, it is possible that these asset purchases, known as quantitative easing, could be wound down completely.
Nonetheless, the Fed balance sheet now exceeds $4 trillion, much larger than the pre-crisis level of $800 billion, and officials have warned that interest rates would remain close to zero until well after the unemployment rate dips to 6.5 per cent.
In his speech, delivered in Philadelphia yesterday, Mr Bernanke spent considerable time defending his move towards a much more open communication policy at the US central bank, including press conferences to explain monetary policy decisions. “The crisis and its aftermath . . . raised the need for communication and explanation by the Federal Reserve to a new level.
“We took extraordinary measures to meet extraordinary economic challenges, and we had to explain those measures to earn the public’s support and confidence,” he said.
One of the champions of more open communication at the Fed is Ms Yellen, who is expected to be confirmed by the US Senate to take over the chairmanship in a vote on Monday evening in Washington. Ms Yellen would be the first woman chair of the Fed.
“I think the Fed’s need to educate and explain will only grow,” Mr Bernanke said.
On financial stability, Mr Bernanke cited progress in financial reform around the world to avoid the pitfalls of 2008, but said the risks of “too big to fail” financial institutions had still not been fully addressed.
“The agenda still includes further domestic and international co-operation to ensure the effectiveness of mechanisms to allow the orderly resolution of insolvent institutions and thereby increase market discipline on large institutions,” he said.
The Fed chairman also strongly defended Fed asset purchases against critics of US monetary policy during his tenure.
“Economic growth might well have been considerably weaker, or even negative, without substantial monetary policy support,” Mr Bernanke said.
“For the most part, research supports the conclusion that the combination of forward guidance and large scale asset purchases has helped promote the recovery,” he added.
– Copyright The Financial Times Limited 2014
