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Ben Bernanke says Fed can do more to spur growth

Federal Reserve Chairman Ben Bernanke arrives Friday at the Jackson Hole Economic Symposium at Grand Teton National Park near Jackson Hole, Wyo. Bernanke said unemployment and the economic recovery remain “far from satisfactory.”

Associated Press

Federal Reserve Chairman Ben Bernanke arrives Friday at the Jackson Hole Economic Symposium at Grand Teton National Park near Jackson Hole, Wyo. Bernanke said unemployment and the economic recovery remain “far from satisfactory.”

JACKSON HOLE, Wyo. — Chairman Ben Bernanke sent a clear message Friday that the Federal Reserve will do more to help the still-struggling U.S. economy.

His remarks seemed to leave two questions: What exactly will the Fed do? And when?

Bernanke described the U.S. economy's health as "far from satisfactory" and noted that the unemployment rate, now 8.3 percent, hasn't declined since January.

He stopped short of committing the Fed to any specific move. But in his speech to an annual Fed conference in Jackson Hole, Wyo., Bernanke said that even with interest rates already at all-time lows, the Fed can do more.

He acknowledged critics' arguments that further Fed action could fan inflation and inject other risks. Yet after raising such arguments, Bernanke proceeded to knock them down.

Some economists predict the Fed will unveil some bold new step as soon as its Sept. 12-13 meeting, possibly a third round of bond purchases meant to lower long-term interest rates and encourage more borrowing and spending. That policy is called "quantitative easing," or QE.

In two rounds of QE, the Fed bought more than $2 trillion of Treasury bonds and mortgage-backed securities. Many investors have been hoping for a third round — a QE3.

"Bernanke has taken a further step along the path to more policy stimulus, most likely a third round of asset purchases (QE3) to be announced at the mid September FOMC meeting," said Paul Dales, senior U.S. economist at Capital Economics.

Others expect something less dramatic: a plan to keep short-term rates near zero into 2015 unless the economy improves, perhaps followed by bond purchases later.

In his speech, Bernanke acknowledged that the Fed is operating in essentially uncharted territory.

Traditionally, central banks stimulate weak economies by pushing down short-term rates. In December 2008, the Fed slashed such rates to record lows. Yet even with short-term rates as low as they can go, the economy still needs help.

Central banks can take "nontraditional" measures when they've run out of conventional ammunition. And under Bernanke the Fed has tried many. Besides embarking on two rounds of QE, the Fed has sold short-term Treasurys and replaced them with long-term Treasurys. That shift is intended to push long-term rates down further.

Bernanke argued Friday that collectively, such measures have succeeded. He cited research showing that two rounds of QE had created 2 million jobs and accelerated U.S. economic growth.

Critics have argued that besides escalating inflation later, the Fed's easy-money policies could push individuals and institutions into riskier investments. That, in turn, could destabilize the financial system.

Bernanke conceded that nontraditional policies carry risks. But he argued that these risks are "manageable." He noted that inflation remains around 2 percent despite "repeated warnings that excessive policy accommodation would ignite inflation." And he said "we have seen little evidence thus far of unsafe buildups of risk or leverage."

Friday's economic reports

• Orders to U.S. companies rose in July, reflecting a surge in demand for autos and commercial aircraft. Factory orders rose 2.8 percent in July, the biggest overall advance in a year, reflecting sizable gains in demand for motor vehicles and airplanes, the Commerce Department said Friday. But core capital goods orders, viewed as a good proxy for investment spending, plunged 4 percent, the fourth setback in the past five months.

• A survey of consumers about their financial security and view of the U.S. economy improved slightly in August, mainly because Americans made headway in cutting their debt, according to a report issued Friday. The University of Michigan-Thomson Reuters' second and final reading of consumer sentiment in August rose to 74.3 from 72.3 in July.

Ben Bernanke says Fed can do more to spur growth 08/31/12 [Last modified: Friday, August 31, 2012 9:23pm]
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