Underscoring how fragile the economy remains two years after the Great Recession, Bernanke laid out three new steps the Fed could take, including a fresh round of government bond purchases designed to stimulate economic growth. "We have to keep all the options on the table. We don't know where the economy is going to go," Bernanke told the House Financial Services Committee. The Fed chairman stopped short of promising anything, but Wall Street appeared comforted that the central bank was poised to act. The Dow Jones industrial average was up more than 150 points during his testimony to Congress, and closed up 45.
But some of the early stock gains were lost after Richard Fisher, president of the Federal Reserve Bank of Dallas, said in a speech that the Fed had already "pressed the limits of monetary policy." The nation was creating about 200,000 jobs a month this spring. But hiring slowed almost to a standstill in June, with 18,000 new jobs. It takes about 125,000 a month just to keep up with population growth. While Bernanke made his twice-yearly appearance before Congress, lawmakers and the White House were trying to salvage talks on how to reduce the federal deficit and whether to raise the limit on what the government can borrow.
If they fail to strike a deal on the debt limit by Aug. 2, the White House has said, the nation will default. President Barack Obama has said he cannot guarantee even that Social Security checks would go out the next day. Moody's Investors Service threatened Wednesday to lower the United States' credit rating, saying there is a small but rising risk of default. Economists have warned that the credit system would tighten, not unlike the worst days of the 2008 financial crisis. Before Congress, Bernanke added his own dire predictions. "If we went so far as to default on the debt, it would be a major crisis because the Treasury security is viewed as the safest and most liquid security in the world," he said.
"It's the foundation for most of our financial - for much of our financial system," he added. "And the notion that it would become suddenly unreliable and illiquid would throw shock waves through the entire global financial system." Asked whether interest rates would go up for everyday Americans, Bernanke said: "Absolutely." The Fed bought $600 billion in government bonds late last year and early this year, a program designed to keep interest rates low and support the prices of assets such as stocks.
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