Fed's Ben Bernanke ready to take action on economy

 

 

Mr Bernanke said all of the possible policy options contained risks

Federal Reserve chairman Ben Bernanke has laid out four "unconventional" policy options to boost the US economy.

Top of the list is more "quantitative easing" - mass purchases of debt.
Speaking to fellow central bankers at the annual Jackson Hole symposium in Wyoming he said the recovery had slowed to "a pace somewhat weaker" than forecast.
Hours earlier economic growth for April to June was revised to an annualised rate of 1.6%, down from 2.4%.

His speech came in the wake of a string of disappointing US economic data in the past month that point to a sharp slowdown in the second half of the year.

Earlier on Friday the US Commerce revised its estimate of second quarter GDP growth down to 1.6%, although this cut was much lower than most Wall Street analysts had expected.
It stands in sharp contrast to a small upward revision of UK economic data, and very strong economic growth in Germany.
Unorthodox toolkit "The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation [a falling rate of inflation]," Mr Bernanke said.
He said the unorthodox policy options each contained risks and would only be used if the outlook worsened further.

Policy Option	Pro	Con
Quantatitive easing (buying up debts).	Worked during the crisis. Holds down long-term borrowing costs.	Hard to quantify effect, and may be less effective when markets are not under stress. Markets may worry about whether the Fed can safely exit its investments. Inflation risk.
Communication (promising to keep rates low for longer, or until certain conditions are met).	Should lower longer term interest rates.	Promises cannot be binding, and conditions for raising rates may be hard to pin down.
Paying zero interest on banks' excess reserves at the Fed.	Interest rate cuts are well understood.	The effect on borrowing costs would be small (0.1%-0.15%). A zero rate could undermine the functioning of money markets.
Targetting a higher inflation rate.	Could help reverse a prolonged period of deflation (falling prices) like in Japan.	Not popular at the Fed. Makes inflation expectations more uncertain. US is not in deflation yet, and the risk is low.

Mr Bernanke was keen to emphasise the apparent success of earlier quantitative easing - including the purchase of $1.25 trillion worth of mortgage debt - in lowering borrowing costs.
The Fed already decided to extend this policy on 10 August, when it announced that any mortgage repayments it received on its investment would be reinvested in US government bonds.
Other options included reducing to zero the interest paid on excess reserves held by banks with the Fed, and committing to maintain rates low for a longer period.
He also discussed the option of raising the Fed's inflation target - something proposed by some economists - though he said it had no support at the Fed.
Sluggish recovery In his review of the US economy, Mr Bernanke expressed particular surprise at the rise in the savings rate of US consumers, and the sharp rise in the US trade deficit.
He also noted that business investment in structures - such as commercial real estate - had failed to rebound.
In order for the recovery to be sustained, he said, consumer spending and business investment needed to pick up more quickly.