Some drags on the economy may lift by the end of this year, spurring growth. But the expiration of tax cuts and mandatory spending cuts loom as a longer-term threat to the economy.
Ben Bernanke made those and other observations in a news conference Wednesday. Some highlights:
—IMPROVING ECONOMY. Bernanke explained why the Fed said in a statement Wednesday that growth may "pick up gradually" after a few more quarters: "Some of the headwinds that have been affecting our recovery, such as the housing markets, financial stresses, credit tightness, and so on ... we hope will be lifting over time and will allow the economy to grow more quickly."
—THREAT TO GROWTH. A slew of tax cuts are set to expire at the end of this year, including a Social Security tax cut and income tax cuts. Automatic spending cuts are also set to kick in. Bernanke said those changes could drag on the economy: "If all the tax increases and spending cuts ... which would take place absent any congressional action were to occur on Jan. 1st, that that would be a significant risk to the recovery."
— WEATHER DISTORTS HIRING: Some of the big gains in hiring over the winter probably occurred because unseasonably warm weather resulted in more construction projects and factory activity than usual, Bernanke said. But that also means the disappointing job report in March might prove temporary: Warm weather "made perhaps January and February artificially strong and March perhaps artificially a little bit weak. But we don't know yet. ... And I wouldn't draw too much conclusion from the March report."
— FED'S NEXT STEPS. Bernanke made clear that if the economy slows, the central bank could take further steps to boost growth. Its previous efforts included buying Treasury bonds to try to lower long-term interest rates. "Those tools remain very much on the table, and we will not hesitate to use them, should the economy require that additional support," Bernanke said.
— LOW RATES. Bernanke made clear that the economy isn't healthy enough to justify ending the Fed's record-low interest rate policies: "I think it's a little premature to declare victory. I think that keeping interest rates low is still appropriate for our economy."
— INFLATION TEMPORARY. Bernanke reiterated the central bank's view that recent spikes in gas prices have pushed up inflation but said that should end soon: "The recent rise in gasoline prices has created a temporary bulge in ... overall inflation. But we expect that to pass through the system, and assuming no new shocks in the oil sector, inflation ought to moderate to about 2 percent later this year." The Fed's preferred inflation measure shows that prices rose 2.3 percent in the 12 months that ended in February.
— FRUSTRATING RECOVERY. When asked what the most frustrating aspect of the economic recovery is, Bernanke said: "The most frustrating aspect ... has been that it's been quite slow. And as a result, here we are almost three years from the beginning of the expansion, and the unemployment rate is still over 8 percent. ... It's been a very long slog. And that, I think, would be the single most concerning thing."