Fed Chairman Bernanke Speaks on U.S. Economy

Chairman Bernanke’s speech on June 7, 2011 held no surprises, with the somewhat down-beat tone reflecting the recent spate of dreary economic reports. While acknowledging that the economy and labor markets have lost some momentum, the Chairman continues to expect a moderate paced recovery to unfold through the second half of the year. He noted that consumers continue to face headwinds such as high gasoline prices and falling house prices, but takes some comfort in the recent moderation in the former. The recent upturn in inflation is expected to be temporary amid high unemployment and steadier commodity prices. He repeated the Federal Open Market Committee's commitment to end QE2 later this month, but to continue reinvesting maturing assets, and also affirmed that low rates are likely justified for an “extended period”.

With the economy still operating well below its potential, “accommodative monetary policies are still needed”, and a full-fledged recovery likely won’t take root until “we see a sustained period of stronger job creation.” He warned the Administration and Congress to establish a credible long-term deficit reduction plan, one that doesn’t jeopardize the fragile economic recovery in the near term.

Bottom Line: The Chairman said it best in that in the face of the worst financial crisis and housing bust since the Depression, “monetary policy cannot be a panacea”. It can only treat the symptoms and alleviate the pain.