Fed's Bernanke Floats Possibility of QE3

Despite comments to the contrary made as recently as June 22, the Federal Reserve is ready to ease monetary policy if the economy weakens further, according to comments made Wednesday by Ben Bernanke.

The catalyst for floating the possibility of further stimulus, also known as QE3, is the downward revision of recent forecasts and the incorporation of last week’s weak employment figures, which indicated an increase in national unemployment to 9.2%.

Noting that the recent “weaker-than-expected economic performance appears to have been the result of several factors that are likely to be temporary,” Bernanke specifically named a run-up in prices of energy, especially gasoline and food, which has reduced consumer purchasing power. He also again alluded to supply chain disruptions from the earthquake in Japan.

But, he said, the apparent stabilization in the prices of oil and other commodities “should ease the pressure on household budgets, and vehicle manufacturers report that they are making significant progress in overcoming the parts shortages [due to Japan’s earthquake] and expect to increase production substantially this summer.”

However, “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 U.S. House of Representatives Financial Services Committee.

Bob Stein, senior economist with Wheaton, Ill.-based First Trust Advisors, found little surprise in the testimony.

“There wasn’t really any news in what the chairman said,” Stein said. “And that, in and of itself, is newsworthy. He really stuck to the Fed’s corporate line, which is that it will soon stop reinvesting its dividends and will stop using the “long term outlook” line before raising rates, probably in the first half of 2012.”