In explaining the Federal Open Market Committee's decision to keep interest rates at rock-bottom levels, Federal Reserve Board Chairman Ben Bernanke told reporters Wednesday that the economy is growing more slowly than expected due to a combination of high energy and food prices, the aftermath of the Japanese tsunami and continued weakness in the housing and banking sector.
"The economic recovery seems to be proceeding at a moderate pace, though somewhat more slowly than the committee had previously expected," Bernanke told roughly four dozen journalists gathered on the top floor of Fed headquarters in Washington, D.C. "The committee expects that the pace of economic recovery will pick up."
The FOMC lowered its projections for growth and employment in 2011 and 2012, and increased inflation expectations. The Fed has "no precise read on why the slower pace of growth is persisting," Bernanke said, pointing to temporary factors such as energy costs and supply chain disruption after the tsunami. He left open the possibility that more long-lasting influences -- such as financial, credit and housing sector weakness -- may continue to drag on the economy into 2012 and "may be stronger and more persistent than we thought."
The Fed is unlikely to change interest rates or take further action for the next two or three FOMC meetings, which happen every quarter, he said. "Depending on how the economy evolves, it could be significantly longer."
In response to a question about whether the Fed might adopt an inflation target, say a 2 percent rate, Bernanke said that move would actually give "the Fed more leeway to respond to short-term shocks to the economy."
"I've been a long-time proponent of an inflation target," he said, while stressing no change is imminent. "It's something that is worth considering."
He said the central bank would first communicate to the public that such a move wouldn't mean that employment targets have been abandoned. "It would be important to take the pulse of Congress," he added. "We may have the legal authority, but I do think we need some buy-in from the administration and Congress to take that step."
In response to a question about whether cutting the federal deficit would create jobs, he said a credible budget agreement to lower deficits in the long term would help stabilize the economy and keep interest rates low. But sudden or sharp spending cuts would be likely to hurt the economy, he said, noting that tighter fiscal policy is a drag on growth.
"In light of the weakness of the recovery, it would be best not to have sudden and swift budget cuts in the very near term," he said. "I don't think sharp, immediate cuts in the deficit would create more jobs. In the very short run you're seeing already a certain amount of fiscal drag coming from state and local governments as well as the withdrawal of previous federal stimulus."
The Fed is monitoring the debt problems of Greece and other European countries, but thus far sees no threat to the stability of U.S. banks or money market mutual funds. Mutual funds do have exposure to core European countries, like Germany and France, so any ripple effects through Europe could impact them, he said.
"That does pose some concern to money market mutual funds and is a reason the Federal Reserve and other regulators are looking at ways to strengthen money market mutual funds," he said. "As we saw in a small situation, a small case last spring, a disorderly default in one of those countries would no doubt roil financial markets globally."
The Fed is trying to address weakness in the housing sector through monetary policy, cease and desist orders and other steps that impact mortgages, he said.
"I'd like to see further efforts to modify loans where appropriate, and where not appropriate, to speed the process of foreclosure and disposition of foreclosed homes in order to clear the market and get these homes out of the pipeline and allow people to operate in a market where they are more confident that prices will be stable, rather than falling," he said. "There is evidently a lot of uncertainty about employment and about the economic recovery, and that is affecting people's willingness to make the commitment to buy a house."