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Fed chairman makes case for new steps to stimulate growth

By BINYAMIN APPELBAUM The New York Times

Publication: The Day

Published September 01. 2012 4:00AM
Ted S. Warren/AP Photo
With the Teton Mountains behind them, Federal Reserve Chairman Ben Bernanke, left, and Bank of Israel Governor Stanley Fischer walk outside the Jackson Hole Economic Symposion at Grand Teton National Park near Jackson Hole, Wyo., Friday.

Jackson Hole, Wyo. - The Federal Reserve chairman, Ben S. Bernanke, delivered Friday a detailed and forceful argument for the benefits of new steps to stimulate the economy, reinforcing earlier indications that the Fed is on the verge of action.

Bernanke said that the Fed's policies over the past several years have provided significant benefits, but that a clear need remained for the Fed to do more and that, in his judgment, the likely benefits of such actions outweighed the potential costs.

"It is important to achieve further pro-gress, particularly in the labor market," Bernanke said in his prepared remarks. "Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."

Bernanke did not announce any new steps in his speech, delivered before an annual monetary policy conference organized by the Federal Reserve Bank of Kansas City. Nor did he offer a timetable, although many analysts expect the Fed to act at the next meeting of its policymaking committee Sept. 12 and 13.

Some of those analysts expect that the Federal Open Market Committee will announce a new round of asset purchases, further expanding its holdings of Treasury securities and mortgage-backed securities to reduce borrowing costs and spur investment. Others expect instead it will announce its intent to keep its benchmark interest rate near zero beyond its current forecast of late 2014.

Stock market rallies

Stocks traded mostly higher on Wall Street after Bernanke's remarks, and commodities like oil and gold gained.

Bernanke devoted much of his speech to asset purchases. He said past rounds of purchases had produced "economically meaningful" benefits, contributing to lower borrowing costs for corporations and the general rise in stock prices. He cited one study finding the combined effect of the Fed's three rounds of asset purchases raised output by 3 percent and increased employment by 2 million jobs.

He offered a shorter description of the benefits of forecasting the Fed's intentions to hold down interest rates, although he said this too has been beneficial.

And importantly, after reviewing the costs of existing actions, and the potential consequences of doing more, he rendered a clear verdict on the balance.

"The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out further use of such policies if economic conditions warrant," Bernanke told the audience of central bankers, fiscal policymakers and academic economists gathered at the Jackson Lake Lodge in the middle of the Grand Teton National Park for the annual conference.

The Fed has sent clear signals in recent months that it is preparing to take new action to stimulate the economy. The Fed's policymaking committee said after its most recent meeting in early August that it "will provide additional accommodation as needed," an unusually strong statement in the language of central banks.

An account of that meeting, which the Fed released last week, said that "Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery."

Since that meeting, economic data has continued to reflect mediocre growth. The depressed housing market, which the Fed describes as a key factor restraining the economy, has shown signs of modest revival. But worries about the Washington standoff over fiscal policy have intensified, and Europe remains on a low boil.

"The economic situation obviously is far from satisfactory," Bernanke said Friday, in remarks that appeared to reflect that the Fed's basic assessment of the economic outlook has not been substantially altered by the recent data.

The government will release one more important estimate, of job growth in August, before the Fed's policymaking committee convenes in two weeks.

In addition to asset purchases and forward guidance, the account of the most recent meeting mentioned two other options. The Fed could cut the interest rate it pays banks on reserves kept at the Fed, which might push some money into circulation. It also could seek to provide low-cost funding for certain kinds of lending, like mortgage loans, emulating a program recently debuted by the Bank of England.

Some members of the committee also have said publicly that they would like to replace that time horizon with a trigger tied to economic data, for example declaring that the Fed is likely to keep interest rates near zero until unemployment falls below a specified level, or until economic output exceeds a certain threshold.

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