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Bernanke hints that Fed action is option
Question of the Day
JACKSON, Wyo. (AP) — Federal Reserve Chairman Ben Bernanke said Friday that the Fed will consider making another large-scale purchase of securities if the slowing economy were to deteriorate significantly and signs of deflation were to flare.
Mr. Bernanke acknowledged that the recent pace of growth is “less vigorous than we expected.” He described the outlook as uncertain and said the economy “remains vulnerable to unexpected developments.”
At the same time, he said growth is likely to pick up next year. He downplayed the odds of another recession, even after a series of dismal reports on housing and manufacturing this week stoked fears that the economy may be on the verge of another downturn.
His remarks came 90 minutes after the government said the economic growth slowed sharply in the second quarter to a 1.6 percent pace.
Mr. Bernanke stopped short of committing to any specific action. But he raised the prospect of another Fed purchase of securities, most likely government debt or mortgage securities, to drive down rates on mortgages and other debt to spur more spending by Americans.
“I believe that additional purchases of longer-term securities should the FOMC choose to undertake them, would be effective in further easing financial conditions,”he said. The FOMC stands for the Federal Open Market Committee, the group of Fed policymakers that makes decisions on interest rates and other steps to aid the economy.
The other two options he laid out are:
—Providing more information in the Fed’s post-meeting policy statements about how long Fed policymakers would continue to keep rates at record lows. For more than a year, the Fed has been pledging to hold rates at ultra-low levels for an “extended period.”
“The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do,” Mr. Bernanke said. “The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using each tool.”
Investors appeared to be pleased by Mr. Bernanke’s remarks. The Dow Jones industrial average rose 114 points in early trading. Broader indexes were also up.
Brian Bethune, economist at IHS Global Insight, said the Fed is right to hold off until it becomes clear that the weakening trend in the U.S. economy is persisting. If the economy shrinks in the third quarter, he said, the central bank’s hand would be forced.
“I think they’d have to make a move,” he said.
The Fed’s strategy carries no guarantees. Short-term interest rates near zero have yet to rejuvenate the economy. The benefits of federal stimulus programs are fading, and Congress has declined to pass any major new economic aid. That is putting immense pressure on Mr. Bernanke to provide relief, and he has no easy options for fixing the economy.
At a Fed meeting earlier this month, Mr. Bernanke persuade his colleagues to use a relatively small amount of money generated by its portfolio of mortgage securities to buy government debt. The goal is to further ease rates on mortgages and other loans.
By Andrew P. Napolitano
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