Bernanke: Fed May Launch New Round of Stimulus
Published: Wednesday, 13 Jul 2011 | 10:54 AM ET
By: Jeff Cox
CNBC.com Staff Writer
Federal Reserve Chairman Ben Bernanke told Congress Wednesday that a new stimulus program is in the works that will entail additional asset purchases, the clearest indication yet that the central bank is contemplating another round of monetary easing.
Bernanke said in prepared remarks that the economy is growing more slowly than expected, and should that continue the central bank stands at the ready with more accommodative measures.
"Once the temporary shocks that have been holding down economic activity pass, we expect to again see the effects of policy accommodation reflected in stronger economic activity and job creation," he said
"However, given the range of uncertainties about the strength of the recovery and prospects for inflation over the medium term, the Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate."
Markets reacted immediately to the remarks, sending stocks up sharply in a matter of minutes. Gold prices continued to surge past record levels, while Treasury yields [cnbc explains] moved higher as well.
But some analysts pointed out that, while Bernanke was suggesting the Fed might add stimulus, he also was saying that the current "soft patch" may prove temporary.
"The bottom line is that he has to say he will respond if needed, but it seems he's saying it more as lip service than anything because ultimately he still expects that this slowdown was temporary," said Tom Porcelli, chief U.S. economist for RBS Capital Markets in New York.
The Fed recently completed the second leg of its quantitative easing program, buying $600 billion worth of Treasurys in an effort to boost liquidity and get investors to purchase riskier assets.
While stocks rose about 6 percent through the course of the program, nicknamed QE2 [cnbc explains] , economic progress has remained elusive.
Delivering his twice-a-year economic report to Congress, Bernanke laid out three options the central bank would consider.
Bernanke said the Fed could launch another round of Treasury bond buying, the third such effort since 2009. It could cut the interest paid to banks on the reserves they hold as a way to encourage them to lend more.
The Fed could also be more explicit in spelling out just how long it planned to keep rates at record-low levels. That would give investors confidence about the Fed's efforts to continue supporting the economy.
Bernanke maintained that temporary factors, such as high food and gas prices, have slowed the economy. He said those factors should ease in the second half of the year and growth should pick up. But if that forecast proves wrong, he said the Fed is prepared to do more.
"The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support," Bernanke told the House Financial Services Committee on the first of two days of Capitol Hill testimony.
Bernanke also said it was possible that inflationary pressures spurred by higher energy and food prices may end up being more persistent than the Fed anticipates.
He said that the central bank would be prepared to start raising interest rates faster than currently contemplated, if prices don't moderate.
Bernanke's comments about inflation spoke to concerns expressed by some regional bank presidents at the Fed. The have criticized the Fed's bond-buying program, saying it has increased the risk for higher inflation.
The Fed has kept its key interest rate at a record low near zero since December 2008. Most private economists believe the Fed will not start raising interest rates until next summer. And some say the Fed won't increase rates until 2013, based on the slumping economy.
Minutes to the central bank's June meeting on Tuesday suggested that, while some members were pondering the possible need for additional easing amid a weak economy, the Fed is not yet ready to take any further action.
But the minutes also reflected divisions within the central bank over further easing, and Bernanke's speech provided a further indicator that a QE3 move is far from off the table.
"Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further," Bernanke said.
Bernanke was testifying after the government released a dismal jobs report last week. The economy added just 18,000 jobs last month, the fewest in nine months.
And the May figures were revised downward to show just 25,000 jobs added—fewer than half of what was initially reported. The unemployment rose to 9.2 percent, the highest rate this year.
Companies pulled back sharply on hiring after adding an average of 215,000 jobs per month from February through April.
The economy typically needs to add 125,000 jobs per month just to keep up wiht population growth.
And at least twice that many jobs are needed to bring down the unemployment rate.
At the June meeting, the central bank lowered its economic growth forecast for the second half of the year and said unemployment wouldn't fall below 8.6 percent this year.
—AP and Reuters contributed to this report.