Fri, Apr 27, 2012 - Page 10 News List

Fed might act to stimulate US economy

OPEN OPTIONS:Fed Chairman Ben Bernanke has said that more rounds of purchases of Treasury bonds and mortgage-backed securities are possible if the economy slides

AP, Washington

US Federal Reserve Chairman Ben Bernanke left open the possibility on Wednesday of further Fed action to stimulate the US economy.

Speaking at a news conference, Bernanke walked a fine rhetorical line: He signaled that the Fed would act more aggressively to reduce unemployment if needed — but not at the cost of high inflation.

Bernanke spoke after Fed policymakers ended a two-day meeting by reiterating their plan to keep interest rates near zero through at least late 2014. The officials said the economy is growing moderately and that the pace would likely pick up.

However, they also cautioned that unemployment would not fall sharply anytime soon and that risks from Europe’s debt crisis remain.

In a statement, they noted that inflation has risen, mainly because of higher fuel prices, but said they expect the spike to be temporary.

Since the financial crisis struck, the Fed has pursued two rounds of purchases of Treasury bonds and mortgage-backed securities to try to push down long-term interest rates. The goal has been to encourage borrowing and spending.

Bernanke said that more bond purchases, or other steps by the Fed, are still an option if the economy weakens.

“Those tools remain very much on the table,” Bernanke said.

The Fed’s decision to leave its policy unchanged had been widely expected and reaction in financial markets was muted. The yield on the 10-year Treasury note edged higher, and the US dollar rose slightly against other currencies. Stock indexes did not move much.

Critics have expressed concerns that the central bank has raised the risk of higher inflation with its campaign to push rates down as long as it has.

In a recent opinion piece in Fortune magazine, Shelia Bair, former chairman of the Federal Deposit Insurance Corp, argued that the central bank might be creating a bond-market bubble similar to the housing bubble.

The “Fed should declare victory and not intervene” by making further purchases of bonds, Bair said.

Asked about this criticism, Bernanke countered that it is “a little premature to declare victory” in the Fed’s drive to stimulate the economy and lower unemployment. Bernanke has frequently pointed to the chronically weak housing market and the more than 5 million US citizens who have been unemployed for more than six months.

At the same time, Bernanke sought to show that he is mindful of the risks of high inflation. He said the Fed would shape its policy to keep inflation no higher than its target of 2 percent over the long term.

After their policy meeting in January, Bernanke and his colleagues had hinted that they were edging closer to a third round of bond buying. However, since then, signs have suggested that the US economy has strengthened.

The government is scheduled to issue its first estimate of economic growth for the January-to-March quarter today.

Many economists are predicting an annual growth rate of 2.5 percent — better than they had expected when the year began.

However, analysts are concerned that growth could weaken in the current quarter, reflecting payback from an unusually warm winter that boosted economic activity in the first quarter.

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