Amid an outpouring of Friday morning data signaling a persistently sluggish economy, Federal Reserve Chairman Ben Bernanke in a speech before the Boston Fed said the U.S. central bank will likely adapt its monetary policy to fight overly low inflation by buying large amounts of government debt.
Bernanke acknowledged that "monetary policymaking in an era of low inflation has not proved to be entirely straightforward" in a wide-ranging speech that touched on issues such as unemployment, consumer spending, and the housing market.
Bernanke delivered his comments Friday morning before the Revisiting Monetary Policy in a Low-Inflation Environment Conference at the Federal Reserve Bank of Boston.
According to a transcript of Bernanke's speech, "Monetary Policy Objectives and Tools in a Low-Inflation Environment," the formulation and conduct of monetary policy in a low-inflation environment is complicated by the fact that low inflation generally implies low nominal interest rates, which has indeed been the case lately in the markets.
Fed Relies on 'Nonstandard Policies'
"Because the short-term policy interest rate cannot be reduced below zero, the Federal Reserve and central banks in other countries have employed nonstandard policies and approaches that do not rely on reductions in the short-term interest rate. We are still learning about the efficacy and appropriate management of these alternative tools," Bernanke said.
That leaves the central bank with fewer options, and the most obvious one is the purchase of vast
quantities of government debt such as Treasury bonds and mortgage-backed securities.
