Bernanke open to possibility of fresh stimulus for US
US Federal Reserve chairman Ben Bernanke said yesterday that he is ready to ease monetary policy further if the economy weakens.
While holding to a view that recent economic softness would pass, he seemed less confident in that projection and more willing to entertain the possibility of another round of stimulus.
"The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support," Mr Bernanke told the US House of Representatives Financial Services Committee.
He specifically noted that Fed forecasts for June, which were already revised down significantly from April, had not incorporated recent data, particularly last week's dismal employment report.
US stocks, which have taken a drubbing on worries about Europe's debt troubles and US economic outlook, rallied 1.2pc, while treasury bond prices and the dollar tumbled.
"The Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate," Mr Bernanke said.
Pressed on the budget during a question-and-answer session, Mr Bernanke reiterated his warning that a failure to raise the US debt ceiling would deal a severe blow to recovery.
Minutes from the Fed's June meeting showed some policymakers believed the Fed should stand ready to provide more support to the economy if the recovery flagged, rekindling the threat of a debilitating downward spiral in prices and wages.
Others on the policy-setting Federal Open Market Committee, however, felt inflation risks might force the central bank to withdraw stimulus sooner than anticipated.
Still, given the change in tune, some investors were betting the more dovish members of the committee would win the day in pushing for a third round of quantitative easing if the economy continues to deteriorate.
"My initial reaction was 'QE3 here we come'," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
US gross domestic product expanded just 1.9pc in the first three months of the year, and the second quarter does not look to have been much better.
Mr Bernanke held to the view that recent weakness was due in part to temporary factors like high energy costs and the effects from Japan's earthquake. But he said the labour market was weaker than the Fed would like.