Fri, Mar 04, 2011 - Page 10 News List

More bond buying possible: Bernanke

SPENDING OR JOBS:The US Federal Reserve chairman said that House spending cuts could result in as many as 200,000 fewer jobs over the next couple of years

Bloomberg

US Federal Reserve Chairman Ben Bernanke didn’t rule out expanding the central bank’s asset purchases aimed at stimulating the economy, saying he doesn’t want to see the US relapse into a recession.

Asked at a House Financial Services Committee hearing on Wednesday what conditions would warrant a third round of so-called quantitative easing (QE), Bernanke said that “what we’d like to see is a sustainable recovery. We don’t want to see the economy falling back into a double dip or to a stall-out.”

Bernanke’s testimony signaled that he would keep the Fed on course to complete US$600 billion of Treasury purchases through June under the second round of quantitative easing, a policy criticized by Republican lawmakers as risking an inflation surge. He’s avoided saying what the central bank might do after that.

A third round of purchases “has to be a decision” of the Federal Open Market Committee, and “it depends again on our mandate” for stable prices and maximum employment, Bernanke said in response to Texas Representative Jeb Hensarling, the House panel’s vice chairman and a critic of QE2.

“We’re looking very closely at inflation both in terms of too low and too high,” Bernanke said during the second day of semiannual testimony on monetary policy. “I want to be sure that you understand that I am very attentive to inflation and potential risks for inflation. That will certainly be a major consideration as we look to determine how to manage this policy.”

Separately, the Fed said on Wednesday in its regional Beige Book survey that the labor market improved throughout the country early this year, driven by increasing retail sales and “solid growth” in manufacturing.

Overall, the economy “continued to expand at a modest to moderate pace,” the central bank said in Washington. Eleven of the Fed’s 12 regional banks, including San Francisco and Philadelphia, described their regions as expanding, improving or experiencing moderate growth. Only Chicago reported growth “at a pace not quite as strong” as before.

Responding to a question from Representative Nydia Velazquez, a New York Democrat, Bernanke said the Fed’s policy of keeping its benchmark rate near zero for an “extended period” helps provide support to the economy, “which in our judgment, it still needs.”

“The economy’s recovery is not firmly established, and we think monetary policy needs to be supportive,” he said.

The second round of bond buying follows a US$1.7 trillion first round of purchases of mortgage-backed debt and Treasuries.

Since August last year, when Bernanke signaled the Fed might buy securities to stimulate the economy, “downside risks to the recovery have receded, and the risk of deflation has become negligible,” he said in testimony.

Many of the questions Bernanke fielded dealt with the outlook for the federal budget deficit, giving the Fed chief an opportunity to reiterate his call for Congress to come up with a long-term plan for reining in the national debt. Bernanke’s statements resonated especially with House Republican lawmakers. The House passed a bill last month cutting US$61 billion from this year’s government spending.

Bernanke got caught up in a debate over the extent to which House spending cuts would result in job losses. He told lawmakers the reductions may lead to about 200,000 fewer jobs over the next couple of years. That compares with the prediction of Mark Zandi, chief economist at Moody’s Analytics, that the budget reductions would mean 700,000 fewer jobs in the US by the end of next year.

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