Bernanke: Fed Committed to Supporting Recovery

While economic growth has slowed, Fed chief sees growth in 2011 and beyond

Federal Reserve Chairman Ben Bernanke said Friday, August 27, that inflation should remain "subdued for some time, with low risks of either a significant increase or decrease from current levels."

While the pace of economic recovery has slowed in recent months--because of slower-than-expected consumer spending and "weakness" in residential and non-residential construction--there will be "some growth in 2011 and in subsequent years," Bernanke said during his speech in Jackson Hole, Wyoming, at the annual Federal Reserve conference. "Broad financial conditions, including monetary policy, are supportive of growth, and banks appear to have become somewhat more willing to lend." Importantly, he continued, "households may have made more progress than we had earlier thought in repairing their balance sheets, allowing them more flexibility to increase their spending as conditions improve. And as the expansion strengthens, firms should become more willing to hire."

The U.S. has "come a long way, but there is still some way to travel," Bernanke said. "Together with other economic policymakers and the private sector, the Federal Reserve remains committed to playing its part to help the U.S. economy return to sustained, noninflationary growth."

With the policy rate near zero, Bernanke noted that the Federal Reserve has a number of tools and strategies for providing additional stimulus, and fighting off deflation.

First is conducting additional purchases of longer-term securities. "I believe that additional purchases of longer-term securities, should the Federal Market Open Committee (FOMC) choose to undertake them, would be effective in further easing financial conditions."

Second is easing financial conditions by modifying the FOMC's communication. The FOMC's post-meeting statement, he said, "currently reflects the FOMC's anticipation that exceptionally low rates will be warranted 'for an extended period,' contingent on economic conditions." A step the Committee could consider, he continued, "if conditions called for it, would be to modify the language in the statement to communicate to investors that it anticipates keeping the target for the federal funds rate low for a longer period than is currently priced in markets."

The third option would be to reduce the interest paid on excess reserves. The interest on excess reserves rate (IOER), which is the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System, "currently set at 25 basis points, could be reduced to, say, 10 basis points or even to zero" to encourage banks to lend, Bernanke said.

The fourth strategy, he said, proposed by several economists, is that the FOMC increase its inflation goals. Under this strategy the FOMC would increase its medium-term inflation goals above levels consistent with price stability, Bernanke explained. However, he said, "I see no support for this option on the FOMC. Conceivably, such a step might make sense in a situation in which a prolonged period of deflation had greatly weakened the confidence of the public in the ability of the central bank to achieve price stability, so that drastic measures were required to shift expectations."

Such a strategy, he continued, "is inappropriate for the United States in current circumstances. Inflation expectations appear reasonably well-anchored, and both inflation expectations and actual inflation remain within a range consistent with price stability."

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