Ben Bernanke will welcome an audit, defend the Fed’s independence and make a case for the Fed’s role in regulation when delivering his monetary policy report to Congress today.
Temporary inventory sell-offs contributed to 4 per cent growth in the second half of last year, Mr Bernanke will say in this speech. Demand must grow in the private sector to plug the gap when the inventory bounce ends. Private sector demand is already growing at a moderate pace, driven in part by a recent pick-up in consumer spending and business investment in equipment and software.
Housing is worrying. Starts of single-family homes, which had been rising, are now flat. Commercial construction is declining sharply, “reflecting poor fundamentals and continued difficulty obtaining financing”.
Reading between the lines, credit appears to be a problem for small businesses. Larger firms are issuing bonds or new equity but bank lending (which small businesses would need) continues to contract, reflecting both weakened demand and restricted supply.
Unemployment is looking slightly better. “The temporary services industry, often considered a bellwether for the employment outlook, has been expanding steadily since October.” But the market remains weak, and there is a troubling increase in long-term unemployment. The rate is forecast to decline to 6.5-7.5 per cent by the end of next year. The rate is currently near 10 per cent.
Mr Bernanke will also repeat the Fed’s exit strategy. Since that testimony, the discount rate has been raised and the maximum term of discount window loans has been reduced further, from 28 days to overnight. At the peak of the crisis, the maximum term was 90 days.