US Federal Reserve Chairman Ben Bernanke said on Wednesday the central bank might need to ease monetary policy further if inflation or inflation expectations fall significantly.
In his first public remarks since the Fed launched a fresh measure aimed at keeping down long-term borrowing costs, Bernanke indicated a willingness to push deeper into the realm of unconventional policy if economic growth remains anemic.
“It is something that we are going to be watching very carefully,” Bernanke said in response to questions from the audience at a forum sponsored by the Cleveland Fed.
“If inflation falls too low or inflation expectations fall too low, that would be something we have to respond to because we do not want deflation,” Bernanke said.
The comment was made in response to a question about a recent decline in market-based inflation expectations, which policymakers see as a good gauge of future inflation trends.
The gap between yields on 10-year Treasury notes and their inflation-protected counterparts fell to 1.70 percent last week, the lowest since September last year. It has edged up slightly since then and last stood at 1.86 percent.
In an effort to stanch the deepest recession in generations and help the recovery, the Fed not only slashed benchmark interest rates to effectively zero, but also more than tripled its balance sheet to around US$2.9 trillion.
Despite these measures, growth has remained soft, averaging less than 1 percent on an annual basis in the first half of the year.
Bernanke signaled that he remains concerned about risks to the economy, which the Fed described as “significant” in a policy statement this month.
“We have a lot of problems both in terms of recovery and in terms of longer-term growth,” he said.
Last week, the Fed said it would sell US$400 billion in short-term Treasury securities and invest them into longer-dated ones to try to put downward pressure on borrowing costs over a longer period. The central bank also intends to renew its help to the housing finance sector by reinvesting maturing mortgage bonds in its portfolio back into that market.
Bernanke on Wednesday called for the US government to beef up its assistance to the ailing housing sector, the epicenter of the 2008 financial meltdown.
Asked about the fate of fallen mortgage giants Fannie Mae and Freddie Mac, Bernanke said that the mortgage market remains too weak for the government to try to privatize the government-sponsored entities.