THE Federal Reserve is prepared to take further steps to rejuvenate the US economy by buying Treasury bonds but is wrestling with how big the programme should be, chairman Ben Bernanke said yesterday.
Mr Bernanke also indicated that Fed policymakers are trying to craft a plan to lift inflation from super-low levels.
He made his remarks in a speech delivered to a Fed conference in Boston (pictured above).
Mr Bernanke said the Fed must weigh the risks of a Treasury-buying programme and determine how the debt purchases would be paced.
The Fed's bond purchases would be intended to lower long-term interest rates to stimulate buying and spending and help lower unemployment.
Fed policymakers are widely expected to announce a Treasury-buying programme at their next meeting on November 2-3.
"There would appear -- all else being equal -- to be a case for further action," Mr Bernanke said.
World stocks rose after the remarks. But the prospect of more dollars swirling around the financial system did nothing to help the dollar itself, which slid further after the Fed chief spoke.
The economy is growing at a pace "less vigorous than we would like", Mr Bernanke acknowledged.
Unemployment, now at 9.6pc, has been stuck near double digits for more than a year.
Mr Bernanke indicated that the Fed was concerned that economic growth was likely to remain lacklustre and that unemployment would decline only slowly next year.
High unemployment is likely to keep consumers cautious in their spending. During the recession, the Fed launched a $1.7 trillion programme, buying a mix of mortgage securities and government debt. The effort was credited with forcing down mortgage rates and providing support to the weakened housing market.
The new programme is likely to be smaller. One Fed official has suggested a $500bn programme, while another said it could be $100bn or less.
The Fed is again resorting to such unconventional methods -- called quantitative easing (or QE) -- to stimulate the economy.
because it has already sliced its key interest rate to a record low near zero. The anticipated second round is being dubbed quantitative easing two (QE2).
"Bernanke gives green light for QE2," TJ Marta, a market strategist at Marta on the Markets, said after Mr Bernanke's speech. For now, the Fed is more interested in seeing prices rise -- rather than fall.
Because the economy is weak, "the risk of deflation is higher than desirable", Mr Bernanke said. Deflation is a widespread drop in prices, wages and the values of stocks and homes.
As Mr Bernanke was speaking, the US government issued a report that pointed to why a new Treasury-buying programme may be necessary to ward off deflation.
Consumer prices, excluding the volatile categories of food and energy, were flat for a second straight month.
A prolonged drop in prices for goods, for wages and in the values of homes and stocks is dangerous for the economy and Americans' pocket-books.
It makes paying on debt much harder, causing more people to fall into foreclosures, default on credit-card bills and companies to slide into bankruptcy.
Mr Bernanke's comments come as the Fed is weighing steps to try to raise people's expectations of where they think inflation is heading in the months ahead.