Federal Reserve has means to deal with slowing growth, says Bernanke

US FEDERAL Reserve chairman Ben Bernanke told his global central bank colleagues yesterday the US central bank still has ample means to counter slowing growth and will use them if necessary.

Speaking at the invitation-only seminar that draws top policymakers from around the world to a resort in the shadow of the Teton mountains every year, Mr Bernanke conceded the US recovery has lost more steam than had been expected. However, he said options exist to deal with that.

Mr Bernanke’s comments came shortly after the US department of commerce announced that US economic growth had been considerably weaker in the second quarter of 2010 than previously thought.

Mr Bernanke described the headwinds facing the US recovery, including heavy debt levels of US households, the still “depressed” state of the housing market and the “prospect of high unemployment for a long period of time”.

Despite the revisions to US gross domestic product yesterday – and other indicators in recent months which have raised questions about the strength of the recovery in that country – Mr Bernanke said a self-sustaining economic expansion “appears to be under way”.

Much of his closely scrutinised speech was devoted to what the Federal Reserve would do in the event of a further weakening of the economy. This was designed to provide reassurance the central bank would step up its policy response if necessary.

Although Mr Bernanke did not describe the trigger point that would result in an expansion of the exceptional measures that the Federal Reserve has used to date, he explained how three separate policy tools might be used.

First, the bank could expand its quantitative easing programme. This involves using newly printed money to buy financial assets.

Second, he suggested that the bank could commit to keeping interest rates at their current exceptionally low levels for longer than currently projected.

Finally, he raised the possibility of cutting one of the central bank’s interest rates from 0.25 per cent to 0.10-0 per cent.

Pointedly, he rejected suggestions Federal Reserve should actively seek to generate inflation, as some economists have suggested.

In theory, if the Fed signalled a higher inflation target, consumers and businesses might be encouraged to spend now for fear of having their future incomes eroded by inflation.

– (Additional reporting: Reuters)