By Ian Swanson - 08/26/10 10:11 PM EDT
Federal Reserve Chairman Ben Bernanke will offer a highly anticipated address Friday amid increased worries the economy is sliding into another recession.
Markets and policymakers are bracing for action from Bernanke, who has offered no public remarks since the Federal Reserve signaled it would not ease off on its efforts to stimulate the economy earlier this summer.
“I don’t expect him to say, 'we’re about to become more aggressive,' ” said Josh Bivens, an economist with the left-leaning Economic Policy Institute who would like to see the Fed expand its efforts.
Since Bernanke’s last public comments, the economy has taken several turns for the worse, raising the stakes for Friday’s address. The troubled economy is stirring Democratic fears they could lose the House and Senate in this fall’s midterm elections.
Stocks slid Thursday, with the Dow Jones Industrial Average closing below 10,0000, despite a new report from the Department of Labor that showed falling unemployment claims for the first time in weeks.
New data released this week showed a slowdown in the manufacturing sector, with businesses cutting back on their investments in equipment and orders for durable goods falling.
Home sales also continued to plummet as the effects of federal tax credits disappeared from the housing sector.
A new report from CoreLogic on Thursday found a decline in the number of residential properties with negative equity, but that mostly reflected continued foreclosures.
Homeowners who owe more on their mortgages than the value of their homes are a huge drag on the economy, said Sam Khater, a senior economist with CoreLogic. Most are able to pay their mortgages, but are trapped in their homes and unable to move for better-paying jobs.
“It holds back the entire economy,” he said. “It’s like a giant anchor on the economy.”
Bivens argues the Fed should take aggressive steps to boost the economy, such as buying up long-term federal debt, which could lower long-term interest rates and spur business investment and sales of durable goods.
He’d also like to see Bernanke say the Federal Reserve would be willing to accept a higher rate of inflation, which would serve as a signal that interest rates will stay low for some time.
“The economy is clearly decelerating, and I think they should reach deep in the tool box,” he said.
Bernanke is more likely to focus on steps the Fed already has taken to deal with the financial crisis, said Tara Sinclair, an economics professor at George Washington University who studies the Fed.
At the same time, she said Bernanke will likely repeat that the Fed is prepared to use its policy tools to prevent a double-dip recession and to prevent deflation, increasingly a concern for the central bank.
The rate of inflation has dropped over the past six months, typically a warning sign for deflation. Economists are worried consumers focused on saving money and reducing their debt will get accustomed to lower prices, and will hold off on spending until prices fall further. This could set off a deflationary cycle that would limit economic growth.
Deflation in the 1990s stifled Japan’s economy, creating a lost decade that continues to hamper that country.
Jim Bullard, president of the St. Louis Federal Reserve Bank, in late July said Fed policies were putting the economy at risk of “a Japanese-style deflationary outcome” over the next few years. Just a few months earlier, Bullard had seemed more concerned about the possibility of inflation, Sinclair said.