Image: A trader looks up at monitor after Federal Reserve Chairman Ben Bernanke's speech
Jin Lee  /  AP
A trader on the floor of the New York Stock Exchange looks up at monitor after Federal Reserve Chairman Ben Bernanke concludes speech in Jackson Hole, Wyo.
By John W. Schoen Senior producer
msnbc.com
updated 8/26/2011 1:55:08 PM ET 2011-08-26T17:55:08

The Federal Reserve has done all it can for now to get the U.S. economy back on track. Now it's time to simply wait for it to heal.

That was the message delivered by Federal Reserve Chairman Ben Bernanke in a widely anticipated speech Friday to an annual gathering of bankers at Jackson Hole, Wyo.

"It may take some time, but we can reasonably expect to see a return to growth rates and (better) employment levels," Bernanke said. "This economic healing will take a while, and there may be setbacks along the way."

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The Fed chairman stopped short of any hint of specific new moves the central bank might make to help accelerate the recovery, saying only that it will "continue to assess the economic outlook in light of incoming information and is prepared to employ the tools as appropriate to promote a stronger recovery."

Story: Bernanke proposes no new steps to boost the economy

That "incoming information" continues to point to a tepid recovery getting weaker. On Friday, the Commerce Department reported that the economy expanded much slower than previously thought in the second quarter. Growth of gross domestic product rose at annual rate of just 1.0 percent, a bit less than its prior estimate of 1.3 percent.

Since the financial panic of 2008, the Fed has responded with an unprecedented policy of purchasing more than $2 trillion in bonds, paid for with fresh cash that has flooded the economy. Those bond purchases have also pushed interest rates down to levels not seen in half a century.

With short-term interest rates at zero, there Fed has few tools left to deploy. It could swap short-maturity bonds in its mammoth portfolio for longer-term securities, pushing long term rates even lower. To spur more bank lending, it could cut the quarter-point interest payment to banks storing cash with the Fed. It has already taken the unusual step of promising to keep interest rates near zero for the next two years.

Bernanke added that the Fed will meet for two days in September instead of the planned one day to mull its options to provide additional monetary stimulus, among other topics.

Story: Fed, with few cards left, makes unusual pledge

One widely-anticipated move would entail forcing even more cash into the system with another round of bond-buying, possibly as much as another $1 trillion.

But, in a narrow sense, the Fed's policies so far have worked: the U.S. economy is awash in cash.

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"We're in much better financial shape, corporations, individuals. Credit card payments are down, the lowest point 17 years on balances, so household balance sheets have been improved," said James Rohr, CEO of PNC Bank. "There's a lot of cash on the sidelines."

The problem now is that money from the Fed's pump-priming isn't flowing fast enough through the system. Business managers, faced with uncertainty about the rising prospect of another recession, are hoarding cash.

Stagnant wages and high unemployment have cut into consumer spending, which typically accounts for more than two-thirds of gross domestic product. Those workers who do have jobs are not in much of a mood to spend.

Consumer sentiment this month fell to its lowest level since November 2008, according to the latest survey by Reuters and the University of Michigan. That consumer confidence index has fallen sharply for the third month in a row to recession levels.

Story: US economic growth slower than expected in spring

"Consumers are fragile, fatigued, and fed up." said Chris Christopher, a senior economist at IHS Global Insight.

Investors had been hoping Bernanke might announce another major cash infusion; much of cash already pumped into the system has gone to support stock prices. But some members of the Fed's policy-setting Open Market Committee have said it's not the Fed's job to keep Wall Street happy.

"My long-standing belief is that the Federal Reserve should never enact such asymmetric policies to protect stock market traders and investors," Philadelphia Fed president Charles Plosser said in a speech in Texas earlier this month.

Chairman Bernanke also faces an unusual level of public dissent from his fellow board members, three of whom voiced objections to the Fed's recent pledge to hold rates low through mid-2013.

Dallas Fed president Richard Fisher, one of those dissenters, has said that making such a promise could have the unintended consequence of prompting businesses to postpone borrowing, which will hurt the recovery.

And he said that central bankers need to be mindful of the penalty imposed by extremely low rates on savers.

"They're getting negative real returns on their investment," he told CNBC. "I think it's hurting the poor and I think it's hurting those savers and I think it's hurting the middle class that have played by the rules, socked away some money for retirement. That's one of the prices we pay to try to re-liquify the system."

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