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Bernanke signals desire for more Fed stimulus

02 september 2012, 12:24
0
US Federal Reserve Chairman Ben S. Bernanke. ©AFP
US Federal Reserve Chairman Ben S. Bernanke. ©AFP
US Federal Reserve Chairman Ben Bernanke expressed deep worry over the US economy Friday and argued for fresh action to stimulate growth from the central bank, AFP reports.

Warning that stagnation in the US labor market was "a grave concern," Bernanke defended the Fed's interventions of the past four years and signaled he would be pushing for more help for the economy when the Fed's policy board meets in 12 days.

"The economic situation is obviously far from satisfactory," he said in the keynote speech of the Fed's annual conference of central bankers in Jackson Hole, Wyoming.

"Growth in recent quarters has been tepid, and so, not surprisingly, we have seen no net improvement in the unemployment rate since January," 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."

Bernanke made clear that the jobless rate, stuck around 8.3 percent, is one of his biggest worries.

"The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years," he said.

In a firm statement, Bernanke said the Fed will take additional action "as needed" to strengthen growth and boost job creation.

Markets liked the news, with oil prices climbing steadily and the S&P 500-stock index clinging to 0.3 percent-plus gains for most of the session.

Bond prices climbed sharply too, with the yield on the 10-year Treasury bond falling to 1.56 percent from 1.62 percent Thursday.

Bernanke, whose easy money policies have been criticized by conservative politicians including Republican presidential candidate Mitt Romney, delivered a lengthy defense of the Fed's actions since the financial crisis.

He said that efforts to drive down long-term interest rates through "quantitative easing" (QE) bond purchase operations and other programs had boosted economic output by three percent and added more than two million jobs "relative to what otherwise would have occurred.

He warned, as he has over much of the past year, that Fed action is not a panacea for policy action from political leaders.

Besides heavy spending cuts by federal and local governments, he said the economy has been held back by partisan battles over raising the debt ceiling and the looming "fiscal cliff" policy -- a poison-pill budget law from last year that could force a sharp contraction in the economy beginning on January 1 if not changed.

"Policymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery," Bernanke said.

Economists said Bernanke's comments raised the likelihood that he could garner support for fresh action in the Federal Open Market Committee's September 12-13 meeting -- whether more firm signaling of Fed intent on keeping interest rates low over the next few years, or a third QE program.

"The Fed chairman's Jackson Hole speech was clearly consistent with more Fed easing, although not definitive," said Jim O'Sullivan of High Frequency Economics.

"At a minimum, we expect officials to extend their forward guidance on the near-zero funds rate at the September meeting, with a slightly better than 50 percent chance that a new asset purchase program -- i.e. QE3 -- will be announced then as well," O'Sullivan said.

"Our expectation is that the Fed will at least extend its forward guidance for the fed funds rate into 2015 and will likely initiate QE3," said Paul Edelstein of IHS Global Insight.

But Bernanke's push for action could run into political headwinds as the battle for the White House, largely focused on the economy under President Barack Obama, intensifies ahead of the November 6 vote.

Obama's rival Romney said last week that he disapproved of the Fed's recent work and that he would seek to replace Bernanke if he wins the presidency.

"I don't think QE2 was terribly effective. I think a QE3, another Fed stimulus, is not going to help this economy. I think that's the wrong way to go," Romney said.


By Paul Handley

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