Federal Reserve Chairman Ben Bernanke painted a gloomy picture of the economy when he testified before the Joint Economic Committee on Capitol Hill. Bernanke told members of Congress that the economic recovery was “close to faltering.” He said that the Federal Reserve had taken great pains to promote economic growth, but it cannot be expected to singlehandedly avert a financial crisis.

“Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy,” he said. “Fostering healthy growth and job creation is a shared responsibility of all economic policy makers.”

The underlying theme of Bernanke’s testimony was that America’s economic growth had been diminished by world events such as the earthquake in Japan and the ongoing wrangle over European debt. The economy has also been undermined from within by domestic problems such as the weak housing market and depressed consumer confidence.

“Consumer behavior has both reflected and contributed to the slow pace of recovery,” he said. “Households have been very cautious in their spending decisions, as declines in house prices and in the values of financial assets have reduced household wealth, and many families continue to struggle with high debt burdens or reduced access to credit.”

Bernanke went on to say that, although prices have risen more sharply than expected over the past year, he expects the situation to stabilize soon. Until now, Bernanke suggested that the economy would recover as long as the government did not interfere. However, in today’s testimony, he appeared to advocate a more proactive role for the government, and he urged legislators to keep four goals in mind when crafting policy.

First, he urged the government to tackle the national debt in the hopes of securing long-term fiscal responsibility. While he welcomed the creation of a Joint Select Committee on Deficit Reduction, he cautioned that much more would need to be done in order to guarantee fiscal sustainability.

Second, Bernanke urged the government to avoid actions that might imperil the economic recovery, such as deep short-term spending cuts. Under the circumstances, legislators could be forgiven for wondering if this was not in conflict with his call to reduce the deficit, but Bernanke assured them that this was not the case.

“These first two objectives are certainly not incompatible, as putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term,” he said. The government’s third goal should be crafting policies that promote long-term growth and economic opportunity.

“As a nation, we need to think carefully about how federal spending priorities and the design of the tax code affect the productivity and vitality of our economy in the longer term,” he said. Finally, Bernanke called on the government to reform its budgeting process. He urged legislators to work out a system that was more transparent and less likely to cause market disruptions due to partisan wrangling.

Bernanke’s comments come amidst mounting pessimism regarding the state of the US economy. Last week, the Economic Cycle Research Institute warned its clients that America was headed toward a new recession. “If you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street,” they said.
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With the failure of the Obama administration to extend its fiscal policy and redeem the American economical illness, people have now fervently placed their hopes in the lap of the Federal Reserve Bank. The American economy is currently going through a rough phase riddles with unfortunate events that has infused pessimism in the system.

Americans are believed to be as pessimistic about the U.S economy as they were during the Great Depression; this shows in key readings of the consumer confidence data. In august the consumer confidence index plunged to its lowest level since April 2009. Consumer confidence index is the degree of optimism consumers have about the overall state of the economy.

It generally indicates the financial situation of the people and their confidence about their future earnings. In a situation like this where rising unemployment and mild lob losses on a constant basis lowers the probability of stability in future income, consumers eventually lose buoyancy and start reducing their spendings.

The consumer confidence index, also sometimes referred to as the expectation index, that dropped 23 point from 74.9 to 51.9 in July. The month of August saw the steepest fall since the heydays of the early recession in 2007.

Jobs in crisis

The darkening outlook of US economy is due to the debt ceiling debates, falling employment, irregular stocks and the downgrade by S&P. With spending cuts and the gloomy jobs outlook, the chances of a sooner-than-expected recovery remains a distant dream.

In a top job-killing list, prepared by CNN Money, Goldman Sachs, the Wall Street giant, took second place; Goldman recently axed 1000 jobs as a part of their cost-cutting effort. Technology giant Cisco Systems also announced a cut of 6500 employees. Top defense supplier to pentagon, The Lockheed Martin said it has laid off 6500 employees and counting.

Research in Motion, maker of Blackberry, also slashed 2000 employees or nearly 10 percent of its workforce. Once the leader in North America Smartphone market, the company finds that sales are waning since Apple launched its new iPhone. With fiscal alternatives drying up there has been a diversion of attention towards the Federal Reserve (FED).

At the two-day FED annual forum at Jackson Hole, Wyoming, Bernanke did not give any hints about another round of economic stimulus, but said that the central bank would do all to help boost recovery. Jesse Cole, head of Merlin Institutional group, said “Bernanke really indicated that the central bank has a lot more tools and weapons at its disposal to stimulate the economy.”

Hopes are sky high since the FED chief used his Jackson Hole speech last year to lay the groundwork for a second round of bond purchases. Earlier in December 2008, the FED chief expanded the meeting for two days and lowered the benchmark interest rate to near zero from 1%

Roller-coaster ride

Recent budget outlooks from the Congressional Budget Office (CBO) provided further proof that the U.S. should be serious about dealing with debt. CBO wants to make about about striking a balance in the efforts to tamp down the debt burden and tanking economic growth.

Not surprisingly, Bernanke echoed a similar voice when he said policymaker should be more careful with current economic recovery and fiscal headwinds that may come up in time. The macro economic situation is difficult with the current high unemployment rates, the high gasoline prices,the  debt mountain, and shrinking alternatives.

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