MercoPress. South Atlantic News Agency

Federal Reserve tries to calm markets; promises further action to prop the economy

Bernanke called on Congress to avoid fiscal actions that could impede the ‘ongoing economic recovery’

The Federal Reserve is prepared to take further steps to help a fragile economic recovery held back by a weak job market and financial stresses in Europe, Fed Chairman Ben Bernanke said on Tuesday.

“The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability” Bernanke said.

Given anaemic employment growth that has depressed consumer confidence, Bernanke urged lawmakers not to cut spending too quickly in the short term even as they grapple with trimming the budget deficit over the long term.

He said government belt-tightening was likely to prove a significant drag on the world's largest economy, which averaged less than 1% annualized growth in the first half of 2011.

“An important objective is to avoid fiscal actions that could impede the ongoing economic recovery,” he said,

Bernanke said European financial strains posed “ongoing risks” to US economic growth, saying they had already dampened the mood of households and businesses.

A depressed housing sector and tight credit are other factors preventing a more robust expansion, Bernanke said, and he offered little prospect that the labour market would improve soon.

“Recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead,” he told the Joint Economic Committee of Congress.

Stressing that higher inflation earlier in the year had not become ingrained in the economy Bernanke argued price pressures will remain subdued for the foreseeable future.

That backdrop made it easier for the Fed to launch a fresh monetary easing effort in September, when it announced it would be selling 400 billion dollars in short-term Treasuries and use the proceeds to buy longer-dated ones.

The policy is expected to have a dampening effect on long-term interest rates, stimulating lending and investment. However, many economists have doubts about its effectiveness, arguing that the key underlying problem is a lack of demand rather than lack of credit.