Bernanke Sees Case for `Further Action' With Too-Low Inflation
Federal Reserve Chairman Ben S. Bernanke said additional monetary stimulus may be warranted because inflation is too low and unemployment is too high.
“There would appear -- all else being equal -- to be a case for further action,” Bernanke said today in remarks to a Boston Fed conference. He said the central bank could expand asset purchases or change the language in its statement, while saying “nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.”
Bernanke’s speech fueled speculation that the Fed will embark on a second round of monetary easing next month. By emphasizing the Fed’s caution and inexperience with its unconventional tools, Bernanke is indicating a preference for taking a “buy-as-you-go approach” with purchases of bonds, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.
“In light of the Fed’s move into uncharted territory,” it “wants to maintain maximum flexibility,” LaVorgna said in a note to clients. The Fed will probably announce another round of large-scale asset purchases in November. Such a program may include a monthly, quarterly or inter-meeting purchase target, he said.
Bernanke didn’t offer new details on how those strategies would be executed or signal the central bank will act at its Nov. 2-3 meeting.
After lowering interest rates almost to zero and buying $1.7 trillion of securities, policy makers are discussing expanding the Fed’s balance sheet by purchasing Treasuries and strategies for raising inflation expectations, according to the minutes of the Federal Open Market Committee’s Sept. 21 meeting.
“At current rates of inflation, the constraint imposed by the zero lower bound on nominal interest rates is too tight” and the “risk of deflation is higher than desirable,” Bernanke said. “High unemployment is currently forecast to persist for some time.”
A smaller-than-forecast increase in the cost of living reported today by the Labor Department punctuated Bernanke’s concern that inflation is too low.
The consumer-price index rose 0.1 percent in September after 0.3 percent gains in the prior two months, figures from the Labor Department showed. Economists projected a 0.2 percent gain, according to the median forecast in a Bloomberg News survey. Excluding volatile food and fuel costs, the rate was unchanged for a second month.
Fed officials’ long-term preferred range for the inflation rate is about 1.7 percent to 2 percent.
“The CPI number will only add to the expectation” that the Fed will take action, Gary Jenkins, head of fixed-income at Evolution Securities Ltd. in London, said in an e-mail. Bernanke is “saying, ‘We are going to do it, but we don’t quite know exactly how we are going to do it.’”
The Standard & Poor’s 500 Index rose 0.1 percent to 1,175.25 at 12:33 p.m. in New York trading. Treasuries fell after data showed U.S. retail sales gained more than forecast in September. The yield on the 10-year Treasury note climbed four basis points to 2.55 percent.
Bernanke “can’t front-run a decision if it hasn’t been made yet, and he’s got a democratic committee, a committee that has a wide range of views,” Vincent Reinhart, former Fed monetary-affairs director, said on Bloomberg Television’s “In the Loop with Betty Liu.”
Since the FOMC’s last meeting in September, New York Fed President William Dudley, Boston’s Eric Rosengren and Chicago’s Charles Evans have indicated they favor further action. Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher have suggested they oppose additional measures. The Kansas City Fed’s Thomas Hoenig has voted against the FOMC’s decisions for the past six meetings.
“Some of the specifics market participants want to hear haven’t been decided on yet,” Reinhart said. Still, “the decision to ease quantitatively is pretty much baked in the cake unless the data turned out to be extremely surprising between now” and the FOMC meeting.
Fed officials, concerned that expectations of lower inflation will become self-fulfilling, are debating whether to encourage Americans to believe that prices will start rising at a faster pace so that they would spend more of their money now, the minutes from last month’s meeting showed. That would reduce inflation-adjusted interest rates and stimulate the economy.
“Central bank communication provides additional means of increasing the degree of policy accommodation,” Bernanke said. “A step the Committee could consider, if conditions called for it, would be to modify the language of the statement in some way that indicates that the Committee expects to keep the target for the federal funds rate low for longer than markets expect.”
Still, it “may be difficult to convey the Committee’s policy intentions with sufficient precision and conditionality,” he said.
The central bank could also expand its securities holdings, which has in the past been “successful” at lowering interest rates, Bernanke said. The Fed doesn’t have much experience with that tool, which makes it difficult to decide the “appropriate quantity and pace of purchases and to communicate this policy response to the public,” he said.
Bernanke said that “despite these challenges, the Federal Reserve remains committed to pursuing policies that promote our dual objectives of maximum employment and price stability.”
The Fed’s September statement was the first in almost two years of near-zero interest rates to say that too-low inflation would merit looser monetary policy.
Low inflation means firms have little pricing power. Target Corp., the second-biggest discount retailer behind Wal- Mart Stores Inc., said last week that it would lower prices on more than 1,000 toys to attract shoppers. Its larger rival responded this week with its own discounts, advertising savings on brands such as Barbie and Nerf toys.
Fed staff economists reduced their U.S. growth forecast for the third straight meeting in September. The economy will grow at a slower pace than previously projected in the second half of 2010 and next year, the minutes said. Fed governors and regional presidents last presented economic projections in June and will revise their predictions at the Nov. 2-3 meeting.
“Overall economic growth has been proceeding at a pace that is less vigorous than we would like,” Bernanke said.
“Consumer spending has been inhibited by the painfully slow recovery in the labor market” and “with long-run inflation expectations stable and with substantial resource slack continuing to restrain cost pressures, it seems likely that inflation trends will remain subdued for some time,” he said.
Bernanke cast doubt on the notion that the unemployment rate has stalled at or above 9.5 percent since August 2009 because of structural changes, a debate that has divided the FOMC. Evans and Rosengren have downplayed the role of structural changes in recent speeches, while Plosser and Minneapolis’s Narayana Kocherlakota have said shifts in the labor market may reduce the effectiveness of additional Treasury purchases.
“We see little evidence that the reallocation of workers across industries and regions is particularly pronounced relative to other periods of recession, suggesting that the pace of structural change is not greater than normal,” Bernanke said.
“Overall, my assessment is that the bulk of the increase in unemployment since the recession began is attributable to the sharp contraction in economic activity.”
While the National Bureau of Economic Research said last month that the worst U.S. recession since the Great Depression ended in June 2009, economic growth slowed to an annualized 1.7 percent rate in the second quarter from 3.7 percent in the first period. The growth figures are adjusted for changes in prices; nominal gross domestic product doesn’t adjust for inflation.
Economists surveyed by Bloomberg News on Oct. 13 projected growth will average 2.7 percent this year and 2.45 percent in 2011, according to the median forecast.
Bernanke echoed the language of the central bank’s September statement by saying that “the FOMC is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate.”
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