Bernanke: U.S. Economy Faces ‘Sluggish’ Growth Outlook
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JUDY WOODRUFF: The ups and downs of the markets and a slowing economy. We begin with some background.
Another turbulent day on Wall Street came amid a host of economic troubles: surging oil prices that this week shot as high as $98 a barrel; a weakening dollar, which fell to an all-time low against the euro yesterday; and one of the steepest downturns in the housing market in two decades.
Federal Reserve Board Chair Ben Bernanke was pressed for his own forecast during testimony before a joint economic committee on Capitol Hill.
SEN. CHUCK SCHUMER (D), New York: Is a recession out of the question? What is the likelihood we might go into a recession? If I could make it simple, on a scale of one to ten, ten being most likely, how likely is a recession?
BEN BERNANKE, Federal Reserve Chairman: Our assessment is for slower growth, but positive growth going into next year. We think that by the spring, early next year, that, as these credit problems resolve and as, we hope, the housing market begins to find a bottom, that the broader resiliency of the economy, which we are seeing in other areas outside of housing, will take control and will help the economy recover to a more reasonable growth pace.
REP. CAROLYN MALONEY (D), New York: Do you think that the decline in the dollar will lead to inflation and higher long-term interest rates?
BEN BERNANKE: The decline of the dollar has the potential to raise import prices and contribute to inflation. And, therefore, we are very attentive to that risk.
JUDY WOODRUFF: Bernanke also addressed concerns about the rising costs of oil, including from Kansas Senator Sam Brownback.
SEN. SAM BROWNBACK (R), Kansas: I look at gas prices, and that’s directly out of a consumer’s pocketbook. That’s a direct hit. And going into the Christmas season, they’re saying, “You know, I’m having to pay a lot more at the pump.” And it seems to really, I think, affect a mentality when you get at that three-dollar-a-gallon gas or above, as it is in many places around the country.
BEN BERNANKE: Senator, you’re absolutely right that this is a big burden for the U.S. economy, although we’ve been pretty resilient so far in dealing with higher oil prices.
But I would just point out that, while it has its effects on consumer spending, it’s obviously also an inflation risk, both because oil prices are part of — gasoline prices are part of the consumer’s basket and therefore part of inflation. And even more concerning would be if those gas prices were to feed through into other costs and lead to a broader rise in prices. And so we have to be very vigilant to make sure that higher oil prices don’t translate into broader inflation in the economy.
Dealing with inflation, slow growth
JUDY WOODRUFF: Bernanke gave no indication whether the Federal Reserve will cut interest rates even further.
For some understanding of how these economic problems are related, we turn to two people who watch these matters closely: Steven Pearlstein, business columnist at the Washington Post; and Kenneth Rogoff, professor of economics at Harvard University and a former chief economist with the International Monetary Fund.
Gentlemen, thank you both.
And, Steven Pearlstein, to you first. We heard the Fed chairman say that he not only expects the economy to slow down, he also says we should look for inflation to be a concern. How do you read all that?
STEVEN PEARLSTEIN, The Washington Post: Well, it's very significant that the Fed chairman was saying he was worried about both of them, and he implied that the economy could both slow and inflation could pick up at the same time.
Traditionally, economic policymakers have thought that you can't have both at the same time. It's the one or the other. If the economy slows, you won't have inflation. If there's a lot of inflation, then that's usually a sign that the economy is overheating, not underheating.
But we're moving into a period, Judy, I think where we're going to be dealing with both at the same time. And this presents a particular problem to Mr. Bernanke, because the one instrument he has to deal with each of these things is the same instrument. If there's inflation, you're supposed to raise interest rates. And if the economy is slowing down too much, you're supposed to lower them.
Well, clearly you can't do both at the same time. And he's in a bit of a bind, as is the whole economy right now, because we're probably going into a period in which both of those things will be happening for good long-term reasons, which is that we need to pay the price for many, many years of living beyond our means.
One way you do that is through inflation; another way you do that is through slowing economy. And we're probably going to get a little of both medicines going forward.
JUDY WOODRUFF: So, Kenneth Rogoff, did he signal today how he's going to walk that line of dealing both, with slowing growth and inflation?
KENNETH ROGOFF, Harvard University: I think he did. I think he was preparing us for fact that there's no magic bullet here, that the Fed sees that the economy is under a lot of stress from housing weakening substantially all over the country, from the dollar falling, from oil prices rising.
But at the same time, if the Federal Reserve tries to jack up growth in the short run, we're going to get a lot of inflation down the road.
It's no fun being Fed chairman when the economy is slowing down like this, but I think the best you can do is just give people an honest assessment and hope that they cut you some slack.
Markets drop, then correct
JUDY WOODRUFF: Help our viewers, all of us, understand a little bit about how all these things are connected. The Fed chairman makes a statement initially today, Steven Pearlstein. The markets reacted negatively. Then, later in the day, they righted themselves. What do you make of that?
STEVEN PEARLSTEIN: Judy, I think it's important not to focus on these day-to-day fluctuations and look at -- step back a little bit and don't even focus on the stock market.
The thing to focus on here is the credit markets. And they are huge. They're complicated. There's not just bond markets the way we used to think of credit markets 25 years ago. These involve derivatives; these involve things like CDOs, and asset-backed securities, and mortgage-backed securities.
And there are trillions of dollars of them sloshing around, and they determine the amount of credit that's available in the world and the cost of money, as well as the availability of it. And those markets are in distress right now.
And because of that, and because of the things unfolding from that, you have the falling dollar, and you have stocks as mostly a collateral damage. The stocks are not the thing to watch. You need to watch the bond markets and the credit markets.
And the cost of credit to everyone other than the United States government and the European governments, the cost of credit is going up. The cost of risk is going up. And that readjustment is causing all sorts of changes in financial markets of all sorts, including the stock market.
So don't look for "he said this, she said that, this company announced that," and look at that as a cause for the stock market going up or down in a given day, because this is really a bigger picture.
JUDY WOODRUFF: So keep an eye on the markets.
And, Kenneth Rogoff, Steven Pearlstein mentioned the falling dollar. Explain to us how that fits into all of this and how worried we should be about that.
KENNETH ROGOFF: Well, the falling dollar is a reflection of the fact that we've been living beyond our means for a long time. The United States has been borrowing $800 billion a year. And at some point, we've got to export more and import less, and having the dollar fall is a piece of that.
When the dollar goes down, it makes it cheaper for everybody else to buy our stuff. And if you try taking a trip to Europe now, you're going to find it's almost twice as expensive as it was five years ago. It's part of that process.
It's no fun. It's no fun having the dollar be weak. It's no fun having oil prices high. But, as Steve said, we've been living beyond our means for a long time, and this is part of the process playing out.
China considers euro over dollar
JUDY WOODRUFF: So, Professor Rogoff, we read this Chinese government official was saying yesterday that his government was looking at putting money into euros instead of the dollar. Is that a consideration here?
KENNETH ROGOFF: Well, that was a mischievous comment, because the Chinese are holding an amount of bonds equal to almost half our national debt. A lot of it's in dollars. And I don't think they're in any position to move it into euro overnight, because they would see the value of their investments decline.
But at the same time, everybody all over the world is looking at the dollar and seeing it fall. Here's the reserve currency, the pillar of the international financial system, and it's looking vulnerable.
JUDY WOODRUFF: And you also, Steven Pearlstein, as both of you have mentioned, have the oil consideration, oil prices high, reaching some peaks this week, $98 a barrel. How does that factor into the rest of what you're discussing here?
STEVEN PEARLSTEIN: Well, like most things in this conversation, unfortunately, Judy, everything there's a cause, there's also an effect. But the falling dollar is -- oil is priced in dollars. And so when the dollar falls, essentially the people who produce oil are getting less for their oil than they were the day before.
So there's a tendency when the dollar falls for the people who produce oil to try to push up the price of oil so they can just keep -- for them, keep the price the same. So that's one thing.
But also the fact that the oil is going up raises the chance of a recession in the United States, which causes -- which has other effects on the dollar. These things have intermingling effects, but they are all a symptom of the fact that we have to take a decline in our standard of living, as Ken said, in order to pay back all this money that we have borrowed.
And one way we take that is by having to pay more for the things we import, including oil, and t-shirts, and computers, and everything else. That's the way we have declining standard of living.
JUDY WOODRUFF: And connect what you just said about oil to the price of gasoline at the pump.
STEVEN PEARLSTEIN: Well, they are separate markets, because oil has to be refined into gasoline, and there are only so many refineries, and they can only ship gasoline to certain places. There are regional markets for gasoline.
But in general, over the long run, you make the gasoline from the oil, and that means that, in the long run or in the medium run, these higher oil prices will translate into higher gasoline prices. I think people are talking about $3.25 before the spring.
A period of risk
JUDY WOODRUFF: So I'm coming away from this conversation, gentlemen, with a headache, feeling pretty depressed. Kenneth Rogoff, down the road, more anxiousness about all of this, is that really what you see as far as the eye can see, so to speak?
KENNETH ROGOFF: I think that's exactly right, and I think that's what the chairman of the Fed was saying. The economy is slowing down. We don't even know how much, and we're in a window of vulnerability.
He said he hopes credit markets will be better in the spring, he hopes the worst of the housing market will be behind us, but that's assuming nothing happens between now and then. We have had it good for a long time. We've been in a long boom. And maybe we're not at the end of it yet, but we've hit a period where we're at risk.
JUDY WOODRUFF: So what should people who are watching do?
KENNETH ROGOFF: Well...
JUDY WOODRUFF: Other than take an aspirin?
KENNETH ROGOFF: I guess turn down the heat a little bit this winter. Take an aspirin.
JUDY WOODRUFF: And, Steven Pearlstein, I don't mean to ask you for market advice, but people just hold onto their seats?
STEVEN PEARLSTEIN: Well, Judy, this is a market that is dominated by traders. And it's something to realize; it's apropos to your question before about the reaction to this comment or that.
This is a market dominated by traders, professional traders, people who buy and sell every minute. They're hyperactive. They go home, and they've closed out their accounts, and they've bought and sold billions of dollars a day and stuff. It is not a market for individual long-term investors.
And the thing about a trading market is that there is no reality other than the reality of the market itself. The trader doesn't really care what's going on in the real economy. All the trader cares about is what the other traders are going to think next.
And so if you think the other traders think that the price of something is going to go up, then you buy it now and then sell it to them in a few minutes, or the reverse and the other.
So the reality of this market is a trading market, and it's not one for individual investors to try to play in, because you're likely to get hurt. It's best to stay to the side. If you've made some money, you might want to take some of that money off the table, but you don't have to take it off, but don't start to try to game the market, because you will fail.
JUDY WOODRUFF: Well, it's a grim picture, but we thank you both for helping us understand it all better. Kenneth Rogoff, Steven Pearlstein, thank you both. We appreciate it.