Bernanke signals Federal Reserve's readiness to intervene in US economy

Sat, Sep 1, 2012, 01:00

BEN BERNANKE sent a clear signal that the US Federal Reserve was ready to do more to support the US economy, saying that its condition was “far from satisfactory”.

Speaking at the Fed’s annual gathering in Jackson Hole, Wyoming, the Fed chairman offered no direct promise of intervention. But by spelling out the feeble state of the economy, the Fed’s intention to be forceful and its range of policy tools, he raised expectations of action during September.

“Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions,” said Mr Bernanke.

The clearest hint Mr Bernanke is ready to do more came from his disappointment with the economy’s progress. He noted some recovery over the past few years but said labour market improvement has been “painfully slow”.

He said “unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time”.

Much of the speech was taken up with a review of the Fed’s actions since the financial crisis. Mr Bernanke argued that large-scale asset purchases aimed at driving down long-term interest rates – known as quantitative easing, or QE – have worked.

“A balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks,” he said.

Mr Bernanke reviewed four possible costs of additional asset purchases. He said they could damage the function of securities markets, raise inflation expectations, undermine financial stability or cause the Fed to make financial losses. He said those costs were uncertain but concluded: “At the same time, the costs of non-traditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.”

Paul Dales of Capital Economics in London, arguing that Mr Bernanke had paved the way for a third wave of quantitative easing, said: “The speech comes across as a staunch defence of the effectiveness of unconventional monetary policy.”

By midday, the SP had rebounded from a drop after Mr Bernanke’s comments, to trade higher by 0.7 per cent. The 10-year treasury note rose, pushing its yield five basis points lower to 1.58 per cent, as markets decided Mr Bernanke’s comments signalled further easing.

Mr Bernanke argued that the Fed’s forecasts of future interest rates – it anticipates rates staying low at least until late 2014 – illustrated its resolve in supporting a recovery. – Copyright The Financial Times Limited 2012