Fed ready to intervene to support US recovery, says Bernanke

31 Aug 12
The chair of the US Federal Reserve has said the central bank stands ready to act to strengthen the country’s economic recovery and improve labour market conditions, raising hopes of a fresh bout of quantitative easing.

By Nick Mann | 31 August 2012

The chair of the US Federal Reserve has said the central bank stands ready to act to strengthen the country’s economic recovery and improve labour market conditions, raising hopes of a fresh bout of quantitative easing.

Speaking at a conference in the state of Wyoming earlier today, Ben Bernanke said that Federal Reserve analysis of its two earlier bouts of asset purchasing suggested they had increased economic output by almost 3% and created more than two million jobs. Together the two programmes, known as QE1 and QE2, involved $2.3 trillion worth of asset purchases aimed at encouraging growth by increasing liquidity in the banking system.

‘A balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks,’ Bernanke said.

Without the use of these ‘non-traditional’ policies, he said it was now clear that the 2007-09 recession would have been deeper than it was and the current economic recovery would have been slower than has actually occurred.

However, despite this, Bernanke said the US economic situation was ‘far from satisfactory’, with unemployment higher than hoped and ‘tepid’ growth in recent quarters.

Among the ‘significant headwinds’ facing the US economy is fiscal policy at both state and federal level. ‘Uncertainties about fiscal policy, notably about the resolution of the so-called fiscal cliff and the lifting of the debt ceiling, are probably also restraining activity, although the magnitudes of these effects are hard to judge,’ he said.

‘It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs. However, policymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery.’

While monetary policy had a part to play, a ‘broader and more balanced’ set of economic policies was needed.

But he said the Federal Reserve was ready to step in and use the tools at its disposal to encourage recovery. ‘Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labour market,’ Bernanke explained.

‘Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability.’

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