His remarks left two questions: What exactly will the Fed do? And when?
Bernanke described the U.S. economy’s health as “far from satisfactory” and noted that the unemployment rate, now 8.3 percent, hasn’t declined since January.
He stopped short of committing the Fed to any specific move. But in his speech to an annual Fed conference in Jackson Hole, Wyo., Bernanke said that even with interest rates already at super-lows, the Fed can do more.
Some economists predict the Fed will unveil some bold new step as soon as its Sept. 12-13 meeting, possibly a third round of bond purchases meant to lower long-term interest rates and encourage more borrowing and spending. That policy is called “quantitative easing,” or QE.
In two rounds of QE, the Fed bought more than $2 trillion of Treasury bonds and mortgage-backed securities. Many investors have been hoping for a third round — a QE3.
“Bernanke has taken a further step along the path to more policy stimulus, most likely a third round of asset purchases (QE3) to be announced at the mid-September FOMC meeting,” said Paul Dales, senior U.S. economist at Capital Economics.
Others expect something less dramatic: a plan to keep short-term rates near zero into 2015 unless the economy improves, perhaps followed by bond purchases later.
Investors took time to digest Bernanke’s speech but in the end seemed pleased. After his remarks were released at 10 a.m. Eastern time, the Dow Jones industrial average shed some of its earlier gains. Then it rose more than 100 points. It closed up about 90 points, or 0.7 percent.
Traditionally, central banks stimulate weak economies by pushing down short-term rates. In December 2008, the Fed slashed such rates to record lows. Yet even with short-term rates as low as they can go, the economy still needs help.
It’s made its public communications more explicit. For example, it’s sought to embolden investors and businesses by saying short-term rates will stay low as long as the economy is weak. The Fed originally said it expected to keep rates “exceptionally low” through mid-2013. It extended that target to late 2014.