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Originally published Friday, August 26, 2011 at 10:02 PM

Bernanke says D.C. needs to work to strengthen U.S. economy

Federal Reserve Chairman Ben Bernanke, while insisting that the long-term U.S. economic prospects remain good, took aim at Washington policymakers for causing upheaval in financial markets and failing to do their part in bolstering the flagging recovery.

Tribune Washington Bureau

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WASHINGTON — Federal Reserve Chairman Ben Bernanke, while insisting that the long-term U.S. economic prospects remain good, took aim at Washington policymakers for causing upheaval in financial markets and failing to do their part in bolstering the flagging recovery.

Bernanke did not rule out new action by the central bank to stimulate growth, but he emphasized that the Fed could only do so much by manipulating interest rates and other monetary policy. And, in a much-anticipated speech Friday, he virtually goaded the White House and Congress to do more to create jobs and strengthen the economy using fiscal policy — which would encompass federal spending, tax cuts and other such measures.

While it is important to reduce the nation's deficits over time, he said — in unusually blunt language for a central bank leader — it would be a mistake to "disregard the fragility of the current economic recovery" and create "fiscal headwinds," a reference to short-term spending cuts at a time of immediate economic needs.

Bernanke's speech was taken by some analysts as a sign that the Fed was prepared to provide new monetary stimulus, possibly as early as its next policymaking meeting in late September.

"He basically punted until then," said Cornelius Hurley, a Boston University professor and a former assistant general counsel at the Fed.

Rep. Brad Sherman, D-Calif., said Bernanke would probably have to take some action because no major fiscal stimulus was likely to come out of the deeply divided Congress and a "political system that is mostly broken."

Bernanke spoke at an annual Fed conference in Jackson Hole, Wyo., shortly after the government released a report that revised downward the second-quarter economic growth to a meager annual rate of 1 percent from 1.3 percent. The revision was largely due to weaker exports; private spending and investment in the April-June period were slightly higher than initially estimated.

Growth in the second half of this year is expected to be a bit stronger, but a major driver of the economy, consumer spending, remains weak amid sluggish hiring and stagnant income gains. And economists say the risks of a double-dip recession have risen sharply as the debt crisis in Europe and the political firestorm over the debt ceiling in Washington and the subsequent downgrade of U.S. debt have jolted Wall Street and taken a toll on public confidence.

In fact, Bernanke blamed the past summer's debt-limit battle for disrupting markets and "probably the economy as well."

"The country would be well-served by a better process for making fiscal decisions," he told central bankers, economists and others gathered at Grand Teton National Park. "Fiscal policymakers could consider developing a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals."

And he warned that continuing partisan warfare over economic policy could inflict long-term damage, no matter what policy decisions were ultimately made.

"The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses," he said.

Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget, described Bernanke's remarks as "an emergency intervention."

"It was great to hear him weigh in so strongly," MacGuineas said. "He's saying what needs to be said, and hopefully people will listen because of the messenger."

Stock markets, which have been on a roller-coaster ride since the downgrade of U.S. debt earlier this month, initially fell after Bernanke's remarks. But they quickly bounced up, with the Dow Jones industrial average finishing 134.72 points higher, or up 1.2 percent, to close at 11,284.54.

Some investors had hoped that Bernanke would signal a new round of major Treasury bond purchases, as he did a year ago at the same conference, in a bid to drive down long-term interest rates even lower and stimulate more lending. But having already flooded the financial system with hundreds of billions of dollars, and pledging earlier this month to keep short-term interest rates near zero for another two years, Bernanke as well as many outside economists have questioned how much bang the Fed could get with another dose of bond purchases.

"The Fed has done everything possible — and then some," said Alice Rivlin, a former Fed vice chairman and a senior fellow at the Brookings Institution. "I don't think anybody is convinced that (additional) monetary policy could affect the recovery greatly.

"If there is action, it has to come from fiscal authorities," Rivlin said.

In his speech, Bernanke acknowledged that the recovery has been slower than expected — and not just because of temporary factors, such as high oil prices and the earthquake and tsunami in Japan, which he and others have cited in the past. Rather, he attributed some of the persistent weakness to the deep slump in the housing market and a financial crisis of historic proportions.

Bernanke sought to reassure people that the U.S. economy, for all of its problems today, had not lost competitive advantages that could lead to long-term growth and prosperity. He mentioned America's technological superiority, entrepreneurial culture and research capabilities.

"Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years," he said.

Material from The New York Times

is used in this report.

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