Speaking before Congress Wednesday, Federal Reserve Chairman Ben Bernanke predicted a slow and fragile economic recovery in the United States, one that is vulnerable to financial markets abroad as well as fiscal policy at home.
Amid the uncertain economic atmosphere, the Federal Reserve will continue its maturity extension program through the end of this year. The program calls for the Fed to purchase short-term Treasury securities and long-term Treasury securities of equal amounts.
In doing so, the Fed ""induce[s] private investors to acquire ""other long-term assets, such as corporate bonds and mortgage-backed securities, helping to raise their prices and lower their yields,"" according to Bernanke.
The Federal Open Market Committee (FOMC) ""made clear at its June meeting that it is prepared to take further action as appropriate to promote stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.""
The housing market has revealed ""modest signs of improvement,"" according to Bernanke. He noted positive signs in new and existing home sales and construction. However, ""a number of factors continue to impede progress in the housing market,"" he stated.
These factors include low levels of confidence in the market and individual economic situations, tight lending standards, negative equity, and damaged credit.
After posting some gains toward the end of 2011, the economy has slowed this year. Gross domestic product rose to about 2.5 percent in the second half of 2011 but slowed to about 2 percent in the first quarter of this year ""and available indicators point to a still-smaller gain in the second quarter,"" Bernanke stated.
The jobs situation has been similar. After adding about 200,000 jobs per month in the fourth quarter of 2011 and the first quarter of 2012, second quarter job growth averaged about 75,000 jobs per month.
""The recovery in the United States continues to be held back by a number of other headwinds, including still-tight borrowing conditions for some businesses and households,"" Bernanke stated before Congress.
He suggested the two main threats to economic recovery are the fiscal atmosphere in the euro-zone and fiscal policy in the United States.
""Europe's financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United States,"" Bernanke said.
Additionally, Bernanke stated, ""As is well known, U.S. fiscal policies are on an unstable path, and the development of a credible medium-term plan for controlling deficits should be a high priority.""
Bernanke warned that the tax increases and spending reductions set to take place early next year barring legislative action, ""a scenario widely referred to as the fiscal cliff,"" would lead to ""a shallow recession"" next year.
Bernanke projects about 1.25 million fewer jobs would be created next year as a result.
Amid these risks, FOMC in June reported ""a higher degree of uncertainty about their forecasts than normal.""
They predict GDP growth to be between 1.9 and 2.4 percent this year and between 2.2 and 2.8 percent in 2013.