By Neil Irwin
Friday, August 27, 2010; 1:38 PM
JACKSON HOLE, WYO. - The Federal Reserve will take new action to bolster the economy only if conditions worsen further, Chairman Ben S. Bernanke said Friday, adding that he expects a continued economic recovery.
The Fed would consider launching a major program to buy securities, among other steps to try to strengthen an economic recovery that has been "somewhat less vigorous" than the central bank expected, Bernanke said Friday in a much-awaited speech at an economic conference in Jackson Hole.
But the central bank will take such steps only if either inflation seems to be falling dangerously low or the recovery seems to be stalling out, and Bernanke said he expects neither to happen. Thus, the speech made clear that further Fed action is not imminent and would only occur if that outlook changed.
"The issue at the stage is not whether we have the tools to help support economic activity and guard against disinflation," Bernanke said at the Kansas City Fed's annual economic symposium. "We do. . . . The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool."
Bernanke said that the Fed's policy committee has not agreed on "specific criteria or triggers for further action," but made clear that action would be undertaken if the nation seems to be falling into a deflationary cycle - which he does not view as a "significant risk" - or if the nation seems to be dipping back into recession, which also is not his expectation.
"Any deployment of these options requires a careful comparison of benefit and cost," Bernanke said. However, Fed policymakers "will certainly use its tools as needed to maintain price stability . . . and to promote the continuation of the economic recovery."
Bernanke enumerated the policy options on the table. At recent Fed policy meetings, he said, participants have discussed renewed large-scale purchases of Treasury bonds and other securities; pledging to keep the Fed's short-term interest rate target near zero for even longer than analysts now expect; or cutting the rate paid on money that banks park at the Fed.
However, Bernanke explicitly rejected a notion, advanced by some economists outside the Fed, that the central bank temporarily increase its target for inflation. "I see no support for this option" on the Federal Open Market Committee, he said.
In discussing the trade-offs involved in undertaking a major new program to buy securities and thus expand the Fed's balance sheet to try to boost growth, which is the most powerful of the tools under consideration, Bernanke noted various risks: that the central bank lacks precise knowledge of what effect the action would have; that the action would have the most impact in a time of financial market distress; and that the bigger balance sheet "could reduce public confidence in the Fed's ability" to unwind the policies.
The speech was one of the most hotly anticipated of Bernanke's tenure as Fed chairman, especially on Wall Street. In recent weeks, the economic situation has deteriorated markedly, and many forecasters now expect that the U.S. economy will grow much too slowly to bring down the unemployment rate in the second half of the year.
Fed watchers were eager for Bernanke to offer clarity on what the approach of Fed policy is over the months ahead, particularly following an action at its Aug. 10 meeting to reinvest proceeds from maturing mortgage securities on its balance sheet.
In discussing the economy, Bernanke adopted a mixed tone, expressing confidence in growth over the medium term while acknowledging that the situation is disappointing at the moment. "In many countries, including the United States and most other industrial nations, growth during the past year has been too slow and joblessness remains too high," he said.
"Incoming data on the labor market has been disappointing," Bernanke added, while business investment in equipment and software "should continue to advance at a solid pace."
The major drain on second-quarter gross domestic product was from trade. "Like others," Bernanke said, we were surprised by the sharp deterioration in the U.S. trade balance in the second quarter. However, that deterioration seems to have reflected a number of temporary and special factors."
A Commerce Department report Friday morning that gross domestic product rose at only a 1.6 percent annual rate in the April-through-June quarter, much worse than the 2.4 percent earlier estimated, is only the latest reminder of how far the economic outlook has fallen. Just in the past week, new data have indicated that the housing sector was in near free-fall in July, that business orders for big-ticket equipment contracted that month, and that new claims for unemployment insurance benefits remained at recessionary levels last week.
Bernanke takes a measure of optimism from recent reports that Americans are saving more. Although a higher savings rate - about 6 percent, compared with the 4 percent earlier estimated - has helped depress consumption in recent months, in the longer term, he said, it "implies greater progress in the repair of household balance sheets," which should in turn allow Americans to increase their spending more rapidly in the future.
In the speech, Bernanke made an effort to try to dissuade listeners from the idea that the Fed, or any central bank, can create a return to prosperity on its own. "A return to strong and stable economic growth will require appropriate and effective response from economic policymakers across a wide spectrum, as well as from leaders in the private sector," he said. "Central bankers alone cannot solve the world's economic problems."