Tue, Dec 07, 2010 page10

• Fed may expand bond buying to boost growth

  UNEMPLOYMENT: Ben Bernanke defended the bank’s quantitative easing measures to prop up a recovery so weak that only 39,000 jobs were created last month

  • Bloomberg
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  US Federal Reserve Chairman Ben Bernanke said the economy was barely expanding at a sustainable pace and that the Fed might expand bond purchases beyond the US$600 billion announced last month to spur growth.

  “We’re not very far from the level where the economy is not self-sustaining,” Bernanke said in an interview broadcast on Sunday by CBS Corp’s 60 Minutes program. “It’s very close to the border. It takes about 2.5 percent growth just to keep unemployment stable and that’s about what we’re getting.”

  Bernanke, in a rare appearance on a nationally broadcast news program, defended the Fed’s efforts to prop up a recovery so weak that only 39,000 jobs were created last month.

  The unemployment rate last month rose to 9.8 percent, the highest level since April, the US Department of Labor said on Friday, three days after the Bernanke interview was taped. US Republican lawmakers have said the Fed’s policy of “quantitative easing” may do little to help unemployment and may fuel inflation.

  “At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate” of about 5 to 6 percent, Bernanke said.

  The purchase of more bonds than planned is “certainly possible,” Bernanke said. “It depends on the efficacy of the program” and the outlook for inflation and the economy.

  Bernanke said a return to a recession “doesn’t seem likely” because sectors of the economy such as housing can’t become much more depressed. Still, a long period of high unemployment could damage confidence and is “the primary source of risk that we might have another slowdown in the economy.”

  The Fed’s decision to undertake new bond purchases sparked a political backlash in Washington. The quantitative easing has been criticized by officials in countries including China and Germany. Policymakers in emerging markets expressed concern it would drive down the dollar and cause a surge of capital abroad that created asset-price bubbles.

  Bernanke in the interview reiterated US complaints that China’s policy of limiting gains in its exchange rate is hurting the US economy.

  “Keeping the Chinese currency too low is bad for the American economy because it hurts our trade,” the chairman said in excerpts of the interview posted on the CBS News Web site. “It’s bad for other emerging market economies. It’s bad for China because among other things it means China can’t have its own independent monetary policy.”

  Two Republicans, Senator Bob Corker and Representative Mike Pence, last month proposed removing the Fed’s maximum employment mandate to focus the central bank on stable prices alone. Corker plans to introduce such legislation next year.

  Bernanke said fears of inflation were “overstated” and that keeping inflation under control was not a diminished priority for the Fed.

  Inflation has slowed this year, with the personal consumption expenditures index, excluding food and energy, rising at a 0.9 percent annual pace in October, the slowest in 50 years. Including all items, the index increased 1.3 percent.

  Without action by the central bank, the economy might have tipped into a period of deflation, or a prolonged drop in prices, Bernanke said.

  “Because the Fed is acting, I would say the risk is pretty low” of deflation, Bernanke said. “But if the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern.”

  Bernanke said he was “100 percent” confident that, when necessary, the central bank could control inflation and reverse its accommodative monetary policy.
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