Bernanke: With unemployment high, Fed can do more

Chairman Ben Bernanke sent a clear message Friday that the Federal Reserve will do more to help the struggling U.S. economy.
By PAUL WISEMAN Published: September 1, 2012
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— Chairman Ben Bernanke sent a clear message Friday that the Federal Reserve will do more to help the struggling U.S. economy.

His remarks seemed to leave two questions: What exactly will the Fed do? And when?

Bernanke described the U.S. economy's health as “far from satisfactory” and said the unemployment rate, now 8.3 percent, hasn't fallen since January.

He stopped short of committing the Fed to any specific move. But in his speech to an annual Fed conference in Jackson Hole, Wyo., Bernanke said that even with interest rates already super low, the Fed can do more.

He acknowledged critics' arguments that further Fed action could fan inflation and inject other risks. Yet after raising such arguments, Bernanke proceeded to knock them down.

Some economists predict the Fed will unveil a bold new step as soon as its Sept. 12-13 meeting, possibly a third round of bond purchases meant to lower long-term interest rates and encourage more borrowing and spending. That policy is called “quantitative easing,” or QE.

In two rounds of QE, the Fed bought more than $2 trillion of Treasury bonds and mortgage-backed securities. Many investors have been hoping for a third round — a QE3.

“Bernanke has taken a further step along the path to more policy stimulus, most likely a third round of asset purchases (QE3) to be announced” at the September meeting, said Paul Dales, senior U.S. economist at Capital Economics.

Others expect something less dramatic: a plan to keep short-term rates near zero into 2015 unless the economy improves, perhaps followed by bond purchases later.

In his speech, Bernanke assessed the economy's weaknesses, defended the extraordinary steps the Fed has taken to date and insisted it can do more.

Investors took time to digest Bernanke's speech but in the end seemed pleased. After his remarks were released, the Dow Jones industrial average shed some earlier gains. Then it rose more than 100 points. It closed up nearly 91 points, or 0.7 percent.

Bernanke said the Fed is operating in essentially uncharted territory.

Traditionally, central banks stimulate weak economies by pushing down short-term rates. In December 2008, the Fed slashed such rates to record lows. Yet even with short-term rates as low as they can go, the economy needs help.

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