Federal Reserve Chairman Ben Bernanke on Friday proposed no new Fed action to boost the slowing economy in a speech many investors were hoping would include a plan for a third program of quantitative easing.
"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," read the text of Bernanke's speech to a Kansas City Fed conference in Jackson Hole, Wy., which was released at 10 a.m. Eastern time. "It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals."
Markets, which opened lower after the , sank on the news as well as on a report from the Commerce Department that second-quarter gross domestic product was revised downward to 1% on an annualized basis from an earlier estimate of 1.3%.
Bernanke said the unusually slow recovery has been hampered by the impact of both the housing and financial downturns, which he said "acted to slow the recovery process."
Said Bernanke, "Notably, the housing sector has been a significant driver of recovery from most recessions in the United States since World War II, but this time--with an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines--the rate of new home construction has remained at less than one-third of its pre-crisis level. The low level of construction has implications not only for builders but for providers of a wide range of goods and services related to housing and homebuilding. Moreover, even as tight credit for some borrowers has been one of the factors restraining housing recovery, the weakness of the housing sector has in turn had adverse effects on financial markets and on the flow of credit."
However, Bernanke sounded more optimistic on a longer-term outlook. "Over the medium term, housing activity will stabilize and begin to grow again, if for no other reason than that ongoing population growth and household formation will ultimately demand it. Good, proactive housing policies could help speed that process."
While he proposed no new specific Fed action, he said, "The Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion."
"The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability," he said.