Bernanke Makes Case for Further Stimulus to Help Jobless
Federal Reserve Chairman Ben S. Bernanke, lamenting the suffering caused by unemployment of more than 8 percent and defending his unprecedented actions, made the case for further monetary easing.
“The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant,” Bernanke said today in a speech to central bankers and economists at an annual forum in Jackson Hole, Wyoming.
Bernanke, speaking two weeks before the next meeting of the Federal Open Market Committee, emphasized that a new round of bond purchases is an option. Stocks and Treasuries climbed and the dollar weakened to a more than three-month low as investors speculated steps to boost the economy may come as soon as next month.
“The door is wide open to the Fed contemplating additional action,” said Josh Feinman, a former Fed senior economist who helps oversee $219 billion at Deutsche Bank AG’s asset management unit in New York. “It reaffirms other messages sent by the Fed that additional action is still very much on the table. By the end of the year we’ll probably get both rate guidance extension and more asset purchases.”
The Standard & Poor’s 500 Index advanced 0.5 percent to 1,406.58 at the close of trading in New York. The yield on the 10-year Treasury note fell to 1.55 percent from 1.62 percent yesterday. The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, declined 0.55 percent to 81.245 after touching 80.964, the lowest level since May 14.
Waste of Talent
Bernanke said long periods of high unemployment produce “enormous suffering and waste of human talent” and also risk causing “structural damage on our economy that could last for many years.”
His 24-page speech at the Kansas City Fed’s symposium reviewed policy actions through the financial crisis and use of tools such as communication and $2.3 trillion in outright bond purchases, concluding that they have been effective in boosting growth and improving financial conditions.
Bernanke cited studies that have shown they have been “economically meaningful” and “significantly lowered long- term Treasury yields” and boosted stock prices.
The S&P 500 has climbed 11 percent this year through yesterday. The yield on the benchmark 10-year Treasury has fallen from a 2012 high of 2.38 percent in March.
Even so, “we have seen no net improvement in the unemployment rate since January,” Bernanke said. “Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time.”
Bernanke concluded by repeating the FOMC’s last statement that the central bank “will provide additional policy accommodation as needed” to spur growth.
The central bank’s asset purchases have spurred criticism from Republicans, including presidential candidate Mitt Romney and House Speak John Boehner of Ohio. The 2012 Republican platform calls for an audit of the Fed’s monetary policy.
The 58-year-old Fed chairman addressed some of the arguments against more purchases. Among them: further buying of Treasuries could disrupt the functioning of the debt market and fuel inflation expectations and asset-price bubbles.
He said the expansion of the Fed’s balance sheet hasn’t “materially affected inflation expectations” because of public confidence in the Fed’s ability to unwind stimulus. Similarly, “we have seen little evidence thus far of unsafe buildups of risk or leverage,” he said, and in the bond markets, “trading among private market participants remains robust.”
Policy makers at their July 31-Aug. 1 meeting were moving toward additional action, according to minutes released last week. Many members of the panel said more stimulus will be needed “fairly soon” unless the recovery shows signs of a “substantial and sustainable strengthening.”
Central bankers considered extending the time horizon the Fed expects to keep its benchmark interest rate low as well as additional bond purchases, the minutes show. Since January, the Fed has said economic conditions would likely warrant keeping the rate “exceptionally low” through at least late 2014. The rate has been kept close to zero since December 2008.
The steps are among the unorthodox policy tools wielded by Bernanke, a 58-year-old former Princeton professor, as he sought to pull the nation out of its worst recession since the Great Depression and then to ensure a lasting recovery.
Bernanke, a student of the Depression, has presided over what the economist William White, a former member of the Bank for International Settlements’ executive committee, calls “one of the greatest economic experiments of all time.”
Three years into the expansion, Bernanke has tried to nudge the economy onto a path of stronger growth to boost hiring. The FOMC on June 20 extended a program, known as Operation Twist, that replaces short-term notes in its portfolio with longer-term assets in an effort to further suppress longer-term interest rates.
The Fed chairman’s unprecedented use of the central bank’s powers -- which also involved the rescue of Bear Stearns Cos. and American International Group Inc. (AIG) during the financial crisis -- has become a contentious issue in an election year.
Romney told the Fox Business Network on Aug. 23 that he wouldn’t reappoint Bernanke, raising questions about the succession more than a year before Bernanke’s term expires in January 2014.
“Criticism is fair game, but this is like political football,” said Mark Gertler, a New York University economist and research collaborator with Bernanke. “Years from now, people who will look back are going to thank God we had Bernanke as chairman over this period and that he was able to keep the focus on the job and conduct responsible monetary policy.”
Since the last FOMC meeting, data on housing, manufacturing and retail sales have exceeded expectations, prompting some Fed officials to cast doubt on the need for additional easing.
St. Louis Fed President James Bullard said in a Bloomberg Television interview today that policy makers should wait for more data before deciding on “big action.”
Still, the signs of strength in the economy may not be enough to satisfy Fed policy makers whose mandate from Congress requires them to aim for maximum employment and stable prices.
Chicago’s Charles Evans, San Francisco’s John Williams and Boston’s Eric Rosengren have said that they favor “open-ended” asset buying. Evans said in Hong Kong Aug. 27 that the FOMC should begin a third round of purchases and keep buying until unemployment falls for at least six months.
Gross domestic product expanded at a 1.7 percent annual rate in the second quarter, slowing from 4.1 percent in the final three months of last year. Employers probably added 127,000 jobs in August, down from 163,000 a month before, according to the median forecast in a Bloomberg News survey of economists before the Sept. 7 Labor Department report.
Cooling growth leaves the world’s biggest economy more vulnerable to fallout from the debt crisis in Europe and the so- called fiscal cliff in the U.S., the $600 billion of tax increases and spending cuts that will take effect automatically at the end of the year unless Congress acts.
Budget cuts at all levels of government have “become an important headwind for the pace of economic growth,” Bernanke said today. In addition, “a major source of financial strains has been uncertainty about developments in Europe.”
Bernanke used the same forum in 2010 to signal a willingness to take additional action. The following November, the Fed decided to buy $600 billion of Treasuries through June 2011.
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