Fed chief says U.S. economy has lost strength

Bernanke open to more steps if conditions don’t improve

Federal Reserve Board Chairman Ben Bernanke pauses before giving a semiannual report to the Senate Banking Committee Tuesday on Capitol Hill.

WASHINGTON — Chairman Ben Bernanke offered a sour assessment of the U.S. economy today and said the Federal Reserve is ready to take further action if growth doesn’t pick up. But Mr. Bernanke provided no clues about what steps the Fed might take or whether any action was imminent.

Investors were hoping Mr. Bernanke would signal that the Fed planned to launch another round of bond purchases, to drive down long-term interest rates and encourage more borrowing and spending.

Stock prices, which had been up moderately in early trading, slipped after Mr. Bernanke’s testimony was released. As he began testifying to the Senate Banking Committee just after 10 a.m. Eastern time, the Dow Jones industrial average was down about 14 points.

Mr. Bernanke is testifying to the House Financial Services Committee. His mid-year report to Congress on the economy comes as job growth has slumped, manufacturing has weakened and consumers have cut back on spending.

Mr. Bernanke acknowledged those trends. He noted that the economy, after growing at an annual rate of 2.5 percent in the second half of 2011, slowed to roughly 2 percent in the first three months of this year and likely weakened further in the April-June period.

The economy will likely continue to expand moderately, he said. But the meager growth would slow further if Europe’s debt crisis worsens or if Congress doesn’t address an impending budget crisis before the end of the year.

“Although declines in energy prices are now providing some support to consumers’ purchasing power, households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low,” Mr. Bernanke said in his testimony.

Even if the Fed announces another round of bond purchases, some economists question how much that would help. They note that mortgage rates and other key interest rates are already at record-low levels.

Mr. Bernanke has noted that the Fed can do only so much to help the economy. In his testimony, he pointed to the Congressional Budget Office’s warning that the economy could suffer a shallow recession next year if Congress fails to reach a budget deal that would avert steep tax hikes and across-the-board spending cuts.

“The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run stability and the fragility of the recovery,” Mr. Bernanke said in his testimony. “Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.”

The economy was already sputtering when the Fed’s policymaking committee last met June 19-20. At that meeting, the Fed decided to extend a program that shifts its bond portfolio to try to lower long-term interest rates. The Fed also reiterated its plan to keep its key short-term interest rate near zero until at least late 2014.

Minutes of the June meeting show that Fed officials were open to taking further action — but were divided over whether the economy needs help now.

Since then, the government has reported that job growth slowed sharply in the April-June quarter — to 75,000 a month from 226,000 a month from January through March. The unemployment rate stayed at 8.2 percent in last month.

Former Fed official Roberto Perli, managing director at the research firm International Strategy & Investment, doubts the Fed will take action at its next meeting July 31-Aug. 1, preferring to wait for more evidence of where the economy is headed.

But if growth and job creation continue to weaken, he says, Fed policymakers might unveil another round of bond purchases at its Sept. 12-13 meeting.