The Fed chairman suggests creating a program of buying U.S. Treasury bonds in an effort to drive down long-term interest rates. Still, it's unknown how and when the central bank will take action.
By Don Lee, Los Angeles Times
7:34 AM PDT, October 15, 2010
Federal Reserve Chairman Ben S. Bernanke on Friday laid out a case for the central bank to take further action to bolster growth, citing the risks of prolonged high unemployment and a U.S. economy slipping into a deflationary spiral.
In a much-anticipated speech in Boston, Bernanke did not spell out details of how and when the Fed would take action. But the first option that he mentioned was a program of buying additional assets, namely government bonds, in an effort to drive down long-term interest rates and stimulate economic growth.
The central bank is widely expected to announce such a program, known as quantitative easing, at the conclusion of its next policymakers' meeting on Nov. 2 and 3.
"There would appear to be a case for further action," he said at a conference sponsored by the Federal Reserve Bank of Boston.
As Bernanke spoke, the government released statistics showing the so-called core inflation rate, which excludes volatile energy and food prices, was unchanged in September and is now running at an annual rate of 0.8% — well below the Fed's informal desired target of 1.5% to 2%. Separately, there was better-than-expected news on last month's retail sales activity as total sales rose 0.6% from the prior month, boosted by higher auto sales.
Bernanke said in his speech that the "preconditions for a pickup in growth next year remain in place," indicating improvements in household finances, solid business investments and a recovery in state and local tax revenues. But the Fed chief also pointed to the troubled housing market and the slow rate of private-sector job growth, which dampens consumer spending and poses risks for the sustainable growth of the whole economy. And while economic growth is expected to be stronger next year, he said, it isn't likely to expand fast enough to bring down the unemployment rate quickly.
Diane Swonk, chief economist at Mesirow Financial in Chicago, said Bernanke's remarks make it clear that quantitative easing by the Fed is "a done deal." But in a note, she said, "the magnitude of what the Fed is willing to buy, in terms of large-scale asset purchases, is still an issue for debate. Our bet is that the Fed could eventually expand its balance sheet by an additional trillion [dollars]."
Analysts are divided on the potential effect of a large-scale Fed purchase of U.S. Treasury bonds to the real economy, given that long-term interest rates are already at historical lows. And in injecting hundreds of billions of dollars into the financial system, there is a threat of higher long-term inflation that could undermine the central bank's credibility.
Still, with little chance of new major fiscal stimulus coming to support the economy, and the Fed at the moment falling short on both of its objectives — maximizing employment and maintaining price stability — analysts say Bernanke and his colleagues have to do something.
