By Steven K. Beckner

Market News International - When Federal Reserve Chairman Ben Bernanke responded to questions at the Brookings Institution this past Wednesday, the media and Wall Street paid most attention to his comment that "the recession is very likely over at this point."

But arguably more important, at least for those trying to anticipate what the Fed's policymaking Federal Open Market Committee will do on Sept. 23 and beyond, were Bernanke's other comments. Taken together with what other officials have said, they imply no termination of the "extended period" of "exceptionally low" interest rates anytime soon or even any feint in that direction.

Nor does it seem likely that the Fed will otherwise tighten credit through quantitative channels. Indeed, if anything, the Treasury Department has complicated the Fed's ability to maintain the existing degree of credit restraint, minuscule as that is.

Bernanke's remark about the recession being "technically" over should not have come as a great surprise. After all, he had strongly hinted as much in his Aug. 21 address to the Kansas City Federal Reserve Bank's Jackson Hole conference, which he repeated verbatim at Brookings, saying "economic activity appears to be leveling out," that "the prospects for a return to growth in the near term appear good" and that the world economy was ""only now beginning to emerge" from recession.

But in that reprised speech, Bernanke also warned that "difficult challenges still lie ahead" and said recovery "is likely to be relatively slow at first, with unemployment declining only gradually from high levels."

After nearly a month since Jackson Hole, Bernanke's wariness had not diminished. That became even more clear from the way he embellished on his speech text in response to questions about the outlook for jobs.

It was those comments that have more import for the direction of monetary policy for the foreseeable future.

"The general view of most forecasters is that the pace of growth in 2010 will be moderate, less than you might expect given the depth of the recession because of ongoing headwinds, including still ongoing financial and credit problems, deleveraging by households, the need for ... sectoral adjustments in the economy, the need for fiscal exit at some point -- many factors that will likely, at least based on current information, make the 2010 recovery moderate, and in particular not much faster than the underlying potential growth rate of the economy."

Given that forecast, Bernanke said "the arithmetic is that, unless the economy grows significantly faster than its longer term growth rate it will be relatively slow in creating jobs over and above those needed to employ people coming into the labor force, and therefore the unemployment rate would tend to come down quite slowly."

Bernanke said, "We could have a stronger recovery," but added, "We could have a weaker recovery."

"But if we do in fact see moderate growth, but not growth much more than the underlying potential growth rate, then unfortunately unemployment will be slow to come down," he continued. "It will come down, but it will take some time."

And that, the chairman said, is "a very serious concern" for the Fed. "Even though from a technical perspective, the recession is very likely over at this point, it's going to feel like a very weak economy for some time as many people still find that their job security and their employment status is not what they wish it was."

"So that's a challenge for us and all policymakers going forward," he added.

In a normal recovery, policymakers would tend to see lingering high unemployment as a lagging indicator and tighten credit preemptively in anticipation of stronger demand relative to the economy's growth potential narrowing the output gap and putting upward pressure on wages and prices.

But this is not a normal recovery, as Bernanke and other Fed officials have repeatedly stressed. Growth, which usually rebounds sharply after a deep recession, is expected to barely exceed the economy's potential, if that. So the unemployment rate was projected, in the FOMC's mid-year economic forecast, to stay in the 9.5% to 9.8% range in 2010 and to stay very high -- in a range of 8.4% to 8.8%. -- in 2011.

It seems doubtful whether the FOMC's central tendency forecasts for growth and employment will change appreciably at the October meeting. The economic data have been improving, but not dramatically, and there is considerable doubt about the strength of recovery, particularly in manufacturing and consumer durable spending, given the statistical impact of the now-expired "Cash for Clunkers" rebate program.

Although market interest rates have remained mercifully low so far, thanks to weak credit demand and low inflation expectations, the federal government's heavy prospective debt burden poses another threat to growth in coming years.

Given the highly uncertain economic outlook, the FOMC majority is convinced that, as the Aug. 12 policy announcement said, "substantial resource slack is likely to dampen cost pressures, and ... inflation will remain subdued for some time."

That sanguine view of inflation has seemingly been validated, notwithstanding record deficit spending, dollar depreciation and soaring gold prices, by the latest retail price data. Although the overall consumer price index rose 0.4% in August, the core CPI was up just 0.1% and 1.4% compared to a year ago.

The beige book survey findings, which will be reviewed by the FOMC, found "minimal" wage pressures and "steady" consumer prices.

Since the last FOMC meeting, the ostensible message from Bernanke's colleagues has been consistent: no need to start removing monetary accommodation at this early and tentative stage of recovery.

Chicago Fed President Charles Evans, an FOMC voter, vowed on Sept. 9 that the Fed will "respond aggressively' to signs of inflation, but suggested those pressures are far off. He said it is "yet too soon" to begin tightening monetary policy.

Evans said "resource gaps" are providing an "enormous mitigant" of wage-price pressures. And he said growth in the monetary base is not likely to lead to the kind of broad money supply growth that could cause inflation until bank lending becomes "much more expansive." Noting that the unemployment rate is 9.7% and manufacturing capacity utilization is just 65%, Evans said "These resource gaps suggest that disinflationary winds are blowing with gale-force effect."

The same day, Dallas Fed President Richard Fisher said the FOMC "will stand and deliver in a timely way" when the time comes to tighten, but not very preemptively.

"As to the Federal Reserve reducing its balance sheet so as not to monetize the excess reserves waiting to be converted to bank loans to the private sector," Fisher said that "given the lag between the time monetary policy is initiated and when it impacts the economy, that wind-down process needs to begin as soon as there are convincing signs that economic growth is gaining traction and that the lending capacity of the banking system is capable of expansion."

But Fisher predicted "a prolonged period" of sluggish growth and "uncomfortably high" unemployment and said "for the immediate future, the risk to price stability is a deflationary risk, not an inflationary one."

On Sept. 10, Atlanta Fed President Dennis Lockhart, also an FOMC voter, said "the U.S. economy is improving but still fragile." He said "recent improvements in the financial sector are supporting economic stabilization," but warned "financial conditions are still vulnerable, and the flow of credit remains constrained."

So Lockhart projected "a slow recovery with ongoing repair of the financial sector and structural adjustments in the broad economy." In a climate of "continuing economic weakness and financial uncertainty," he said "firms have very little pricing power. ... I expect inflation will remain contained for some time."

Later that week, Fed Vice Chairman Donald Kohn said that "with the global economy quite weak and inflation low, a large and rapid rise (in interest rates) seems quite improbable." He was referring to the rate the Fed pays on reserves, but since the Fed plans to raise that rate in line with the federal funds rate, he seemed to be suggesting the Fed won't aggressively hike its policy rate once it begins tightening.

This past week, the chorus was much the same.

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