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Fed ready to bolster economy, Reserve Chairman Ben Bernanke says

Ben Bernanke warned against default on government debt. 

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Ben Bernanke warned against default on government debt. 

WASHINGTON — Federal Reserve Chairman Ben Bernanke told lawmakers Wednesday that the Fed is ready to act if the economy gets weaker. He also warned them that allowing the nation to default on its debt would send "shock waves through the entire financial system."

Underscoring how fragile the economy remains two years after the Great Recession, Bernanke laid out three new steps the Fed could take, including a fresh round of government bond purchases designed to stimulate economic growth.

The Fed bought $600 billion in government bonds late last year and early this year, a program designed to keep interest rates low and support the prices of assets such as stocks.

It was the second time the Fed had taken that step since the recession started. Besides a third round of "quantitative easing," Bernanke laid out two additional options if the economy weakens:

• The Fed could offer financial markets more clarity about how long it tends to leave interest rates at record lows, where they have stood since December 2008.

• It could start paying banks less interest on the excess money they park with the Fed. It doesn't pay much now — 0.25 percent. But paying even less would encourage the banks to loan the money out.

"We have to keep all the options on the table," Bernanke told the House Financial Services Committee.

While Bernanke made his twice-yearly appearance before Congress, lawmakers and the White House were trying to salvage talks on how to reduce the federal deficit and whether to raise the limit on what the government can borrow.

If they fail to strike a deal on the debt limit by Aug. 2, the White House has said, the nation will default on its debt.

"If we went so far as to default on the debt, it would be a major crisis because the Treasury security is viewed as the safest and most liquid security in the world," Bernanke said.

Fed ready to bolster economy, Reserve Chairman Ben Bernanke says 07/13/11 [Last modified: Wednesday, July 13, 2011 9:40pm]
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