Daily News: July 17, 2012

Bernanke Highlights Risks to Economic Growth to Congress

In the Federal Reserve’s semiannual Monetary Policy Report to Congress, Fed chairman Ben Bernanke noted that economic activity has decelerated during the first half of 2012 and cited the euro-zone crisis, tight borrowing conditions in the U.S., restraining effects of fiscal policy and fiscal uncertainty as risks to future growth.

He added that the reduction in the unemployment rate seems likely to be “frustratingly slow,” explaining that the central tendency of participants’ forecasts now has the unemployment rate at 7% or higher at the end of 2014.

Regarding risks to the economy, he said Europe’s financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the U.S. Moreover, the possibility that the situation in Europe will worsen further remains a significant risk to the outlook.

Bernanke noted the second important risk to economic recovery is the domestic fiscal situation. He said, “As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken.”

To read a transcript of Bernanke’s testimony, click here.