U.S. economic growth continues to proceed at a "moderate pace", but the Federal Reserve remains prepared to take action if financial stresses escalate, the nation's top central banker told lawmakers on Capitol Hill Thursday morning.
In prepared remarks before the Joint Economic Committee of Congress, Federal Reserve Chairman Ben Bernanke made no explicit reference to further easing measures despite an ongoing crisis in Europe and recent weakness in the labor market.
The question and answer portion of Bernanke's testimony will be scrutinized for signs the Fed is moving toward a third round of quantitative easing.
Economists say the Fed is increasingly likely to offer further stimulus to prevent the fragile economy recovery from fizzling out.
Earlier this week, a pair of key Fed officials expressed support for additional measures to prop up the economy. And this morning, China's central bank unexpectedly its cut benchmark interest rates by 25 basis points.
Economists say the move from Beijing is a clear sign that central banks are becoming alarmed about the health of the global economy.
Here in the U.S., recent figures have shown a recovery in the labor market has stalled, with unemployment rising back to 8.2 percent in May.
Bernanke told Congress that the slowing in the labor market "may have been exaggerated by issues related to seasonal adjustment and the unusually warm weather this past winter."
"But it may also be the case that the larger gains seen late last year and early this year were associated with some catch-up in hiring on the part of employers who had pared their workforces aggressively during and just after the recession," he added.
On a positive note, gains in household spending has been sustained amid a drop in gasoline prices. Despite the European crisis, demand for U.S. exports has also held up, according to Bernanke.
He also noted signs of improvement in the sluggish housing sector, including "some pickup in sales and construction, improvements in homebuilder sentiment, and the apparent stabilization of home prices in some areas."
Bernanke urged European leaders to step up efforts to calm market fears by developing a credible framework to get the region's fiscal affairs in order.
Lawmakers in the U.S. should refrain from drastic spending cuts that would prevent a more robust recovery at home.
"Preventing a sudden and severe contraction in fiscal policy will support the transition back to full employment, which should aid long-term fiscal sustainability," Bernanke said.
Bernanke also cautioned that allowing all of the tax cuts enacted under former President George W. Bush to expire as scheduled at the end of the year could pose a drag on economic growth.
If all other factors were held constant, Bernanke said, the expiration of those tax cuts would have a "significant" negative impact on the economy.
"I'm not necessarily say that the right thing to do is extend those cuts," he said, noting that Congress could potentially take other actions. However, he said the tax cuts are "the single biggest component of that fiscal cliff."
Bernanke urged lawmakers not to repeat last year's showdown over raising the federal debt ceiling, noting that the 200-year history the U.S. has established of paying its debts is one of the country's greatest strengths.
"It's a strength we should not squander if at all possible," he said.
by RTT Staff Writer
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