Bernanke Stands Ready
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Federal Reserve Chairman Ben Bernanke said Friday that while they are not ready to re-engage, if deflationary risks emerge another round of quantitative easing could be used to help boost the sluggish U.S. economy.
"The pace of recovery in output and employment has slowed somewhat in recent months, in part because of slower-than-expected growth in consumer spending, as well as continued weakness in residential and nonresidential construction," Bernanke said at the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole, Wyoming. "Despite this recent slowing, however, it is reasonable to expect some pickup in growth in 2011 and in subsequent years."
His comments came just after the government said that the rate of economic growth in the second quarter had slowed more than previously thought to a pace of 1.6 percent.
Bernanke discussed three tools the Fed can use.
One option could be additional long-term treasury purchases. This would bring down interest rates further, but Bernanke expressed uncertainty about the quantitative effects of securities purchases. It could also reduce confidence in the Fed ability to exit. "One risk of further balance sheet expansion arises from the fact that, lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings on financial conditions," Bernanke said.
A second option is modifying the Committee's communication. The FOMC could tweak the the policy statement to imply that the rates will be held at "exceptionally low levels" for an even longer period that suggested by the current statement of "extended period." The Fed could explicitly lay out the conditions. "Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations," Bernanke said.
A third option would be to reduce the interest paid on excess reserves. This would expand money and credit aggregates, but could disrupt some key financial markets and institutions.
The Fed's potential strategy carries no guarantees, as interest rates near zero have yet to stimulate the economy. The benefits of the government's stimulus packages are fading or are gone, and Congress has yet to act on a new economic bill to generate some economic activity.
"Much of the unexpected slowing is attributable to the household sector, where consumer spending and the demand for housing have both grown less quickly than was anticipated. Consumer spending may continue to grow relatively slowly in the near term as households focus on repairing their balance sheets. I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace."
"The pace of recovery in output and employment has slowed somewhat in recent months, in part because of slower-than-expected growth in consumer spending, as well as continued weakness in residential and nonresidential construction," Bernanke said at the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole, Wyoming. "Despite this recent slowing, however, it is reasonable to expect some pickup in growth in 2011 and in subsequent years."
His comments came just after the government said that the rate of economic growth in the second quarter had slowed more than previously thought to a pace of 1.6 percent.
Bernanke discussed three tools the Fed can use.
One option could be additional long-term treasury purchases. This would bring down interest rates further, but Bernanke expressed uncertainty about the quantitative effects of securities purchases. It could also reduce confidence in the Fed ability to exit. "One risk of further balance sheet expansion arises from the fact that, lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings on financial conditions," Bernanke said.
A second option is modifying the Committee's communication. The FOMC could tweak the the policy statement to imply that the rates will be held at "exceptionally low levels" for an even longer period that suggested by the current statement of "extended period." The Fed could explicitly lay out the conditions. "Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations," Bernanke said.
A third option would be to reduce the interest paid on excess reserves. This would expand money and credit aggregates, but could disrupt some key financial markets and institutions.
The Fed's potential strategy carries no guarantees, as interest rates near zero have yet to stimulate the economy. The benefits of the government's stimulus packages are fading or are gone, and Congress has yet to act on a new economic bill to generate some economic activity.
"Much of the unexpected slowing is attributable to the household sector, where consumer spending and the demand for housing have both grown less quickly than was anticipated. Consumer spending may continue to grow relatively slowly in the near term as households focus on repairing their balance sheets. I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace."
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