Some factors that are weighing on the economy may lift by the end of this year, spurring growth. But the expiration of tax cuts and mandatory spending cuts loom as longer-term threats.
Fed Chairman Ben Bernanke made those and other observations in a news conference Wednesday. Some highlights:
- IMPROVING ECONOMY. Bernanke explained why the Fed said Wednesday that growth may "pick up gradually": "Some of the headwinds that have been affecting our recovery, such as the housing markets, financial stresses, credit tightness, and so on ... we hope will be lifting over time and will allow the economy to grow more quickly."
-THREAT TO GROWTH. A Social Security tax cut and income tax cuts are set to expire at the end of this year. Automatic spending cuts are also set to kick in. "If all the tax increases and spending cuts ... which would take place absent any congressional action were to occur on Jan. 1st, that that would be a significant risk to the recovery."
- WEATHER EFFECT: Some of the big gains in hiring over the winter probably occurred because unseasonably warm weather resulted in more construction projects and factory activity than usual, Bernanke said. Warm weather "made perhaps January and February artificially strong and March perhaps artificially a little bit weak."
- FED'S NEXT STEPS. Bernanke made clear that if the economy slows, the Fed could take further steps to boost growth. Its previous efforts included buying Treasury bonds to try to lower long-term interest rates. "Those tools remain very much on the table," Bernanke said.
- LOW RATES. Bernanke made clear that the economy isn't healthy enough to justify ending the Fed's record-low interest rate policies: "I think it's a little premature to declare victory."
- INFLATION TEMPORARY. Bernanke noted that higher gas prices have pushed up inflation: "But we expect that to pass through the system, and assuming no new shocks in the oil sector, inflation ought to moderate to about 2 percent later this year." The Fed's preferred inflation measure shows that prices rose 2.3 percent in the 12 months that ended in February.
- FED'S INFLATION STANCE: "We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we've been able to take strong accommodative actions in the last four, five years to support the economy."
- FRUSTRATING RECOVERY. When asked what the most frustrating aspect of the economic recovery is, Bernanke said: "Here we are almost three years from the beginning of the expansion, and the unemployment rate is still over 8 percent. ... It's been a very long slog."