Skip Navigation

Close and don't show again.

Your browser is out of date.

You may not get the full experience here on National Journal.

Please upgrade your browser to any of the following supported browsers:

Bernanke Says Fed Is Prepared To Act, But Not Yet Bernanke Says Fed Is Prepared To Act, But Not Yet

NEXT :
This ad will end in seconds
 
Close X

Not a member? Learn More »

Forget Your Password?

Don't have an account? Register »

Reveal Navigation
 

 

ECONOMY

Bernanke Says Fed Is Prepared To Act, But Not Yet

Federal Reserve Chairman Ben Bernanke said today the central bank has three policy options ready to boost the slumping U.S. economy, but it is not willing to implement them unless more troubling signs such as deflation start to show.

In prepared remarks in Jackson Hole, Wyo., Bernanke said the Fed has tools to provide help to the economy if growth and unemployment figures continue on their dismal path, but the board has not agreed on "specific criteria or triggers for further action."

 

Bernanke's speech came as the Commerce Department revised its economic growth report for the second quarter to a 1.6 percent annual rate, a decrease from its 2.4 percent forecast. That follows a troubling report this week that showed existing home sales plunged in July at the same time orders for factory goods also fell flat.

The Fed is under increasing pressure to do more, especially as Congress appears unlikely to act on any significant policy before the midterm election and fears mount over a double-dip recession or a case of deflation like Japan endured through the 1990s.

The Fed would actively work against any signs of deflation, Bernanke promised.

 

"Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation," he said. "It is worthwhile to note that if deflation risks were to increase, the benefit-cost tradeoffs of some of our policy tools could become significantly more favorable."

Bernanke said the Fed has studied three "unconventional measures" it could use after already setting its federal funds rate near zero and pumping up its balance sheet to more than $2 trillion in assets to stave off a collapse during the 2008 banking crisis.

"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 the tool," he said.

The central bank could make additional purchases of longer-term debt and continue to expand its balance sheet. But Bernanke said the Fed does not know the effect it would have on the economy given that central bank has not had much experience with such an option.

 

"In particular, the impact of securities purchases may depend to some extent on the state of financial markets and the economy; for example, such purchases seem likely to have their largest effects during periods of economic and financial stress, when markets are less liquid and term premiums are unusually high," he said. "The possibility that securities purchases would be most effective at times when they are most needed can be viewed as a positive feature of this tool."

Another option would be for the Fed to announce it would keep short-term rates low for an extended period until the economy starts to recover. For example, the Bank of Canada announced such a policy in April 2009 until July 2010, based on its inflation outlook.

"Although this approach seemed to work well in Canada, committing to keep the policy rate fixed for a specific period carries the risk that market participants may not fully appreciate that any such commitment must ultimately be conditional on how the economy evolves," Bernanke said.

DON'T MISS TODAY'S TOP STORIES
Sign up form for the newsletter

He added the Federal Open Market Committee would continue to review its public statements with "communicating its outlook and policy intentions as clearly as possible."

A third option would be to lower the rate of interest that the Fed pays banks on the reserves they hold with the Fed, with a goal of spurring institutions to generate more business lending. But Bernanke said any such change would have a small effect on the economy.

Bernanke said the Fed board has little support for raising its medium-term target for inflation, saying it would only make sense in a period of prolonged deflation.

DON'T MISS TODAY'S TOP STORIES

Sign up form for the newsletter
Comments
comments powered by Disqus
 
MORE NATIONAL JOURNAL