Bernanke says Fed 'will do all it can' to boost recovery
More securities purchases could be a possibility if growth deteriorates
Federal Reserve chairman Ben Bernanke said the US central bank "will do all that it can" to ensure a continuation of the economic recovery and that more securities purchases may be warranted if growth slows.
"The committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly," the Fed chairman said yesterday to central bankers from around the world at the Kansas City Fed's annual monetary symposium held in Jackson Hole, Wyoming.
Mr Bernanke's speech follows a drumbeat of negative economic reports, including a reduced estimate of second-quarter growth released yesterday, which have prompted economists, including Harvard University's Martin Feldstein, to warn that the risks of a renewed recession are rising. Still, the Fed chairman stopped short of signalling that further easing would come as soon as September 21, when Fed officials next meet.
"He is trying to buy time," said Ethan Harris, head of Developed Markets Economics at Bank of America-Merrill Lynch Global Research in New York. "He is acknowledging that the economy is weaker and is saying they have policy options going forward."
The Fed chairman gave a detailed analysis of the economy and said growth during the past year had been "too slow" and unemployment too high.
Even so, he said a handoff from fiscal stimulus and inventory restocking to consumer spending and business investment "appears to be under way". He also said the "preconditions" for a pick-up in growth in 2011 "appear to remain in place".
Stocks rallied on the prospect of additional Fed support, and Treasuries declined. The Standard & Poor's 500 Index rose 1.3pc to 1,061.13 in New York. The yield on the 10-year Treasury note climbed to 2.63pc from 2.48pc late Thursday.
The Commerce Department yesterday cut its estimate for US gross domestic product in the second quarter to an annual pace of 1.6pc from an initially reported 2.4pc. The revised figure exceeded the median forecast for a 1.4pc expansion in a Bloomberg News survey of economists.
"There's still a significant risk, maybe one chance in three, that there will be a double dip, real GDP falling, before we're in the clear," Mr Feldstein, a member of the committee at the National Bureau of Economic Research that dates the beginning and end of recessions, said. "We see a fragile economy that is growing at a slower pace."
Mr Bernanke said the risk of an "undesirable rise in inflation or of significant further disinflation seems low".
He said the Fed had several tools if prices decelerated or job growth stagnated, including shifting the composition of its bond reinvestment strategy.
"The Fed is ready to take action if needed," said John Silvia, chief economist at Wells Fargo Securities. "They are aware the economy is not doing as well as expected."
The Federal Open Market Committee (FOMC) on August 10 put its exit strategy on hold and decided to purchase Treasury securities to keep the central bank's portfolio from shrinking as its mortgage bonds mature. The committee set a floor of $2.05trillion (€1.61trn) for their holdings of securities.
"The FOMC's recent decision to stabilise the Federal Reserve's securities holdings should promote financial conditions supportive of recovery," Mr Bernanke said yesterday. "Additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions."
Mr Bernanke provided his most detailed analysis yet of three policy options open to the Fed: further purchases of securities, a change in its policy statement and a reduction of the interest rate the Fed pays on banks' excess reserves.
Consumer confidence has been sapped by unemployment close to a 26-year high.
Meanwhile, confidence rose less than forecast in August from an eight-month low, a Thomson Reuters/University of Michigan index showed yesterday. (Bloomberg)