JACKSON HOLE, Wyo. — 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.
Central banks can take “nontraditional” measures when they've run out of conventional ammunition. Under Bernanke, the Fed has tried many.
It's made its public communications more explicit. For example, it's sought to embolden investors and businesses by saying short-term rates will stay low as long as the economy is weak.
Besides the two rounds of QE, the Fed has sold short-term Treasurys and replaced them with long-term Treasurys. That shift is intended to push long-term rates down further.
Bernanke argued Friday that such measures have succeeded. He cited research showing two rounds of QE had created 2 million jobs and accelerated U.S. economic growth.
Even if the Fed acts further, many analysts doubt it will make much difference. Interest rates, short- and long-term, are near historic lows. Borrowing — for those who have the credit — has never been cheaper. Yet the economy remains in a rut.
Critics have also argued that besides escalating inflation later, the Fed's easy-money policies could push individuals and institutions into riskier investments. That could destabilize the financial system.
Bernanke conceded that nontraditional policies carry risks. But he said these risks are “manageable.” He said inflation remains about 2 percent despite “repeated warnings that excessive policy accommodation would ignite inflation.” He said “we have seen little evidence thus far of unsafe buildups of risk or leverage.”
In his speech, Bernanke seemed to embrace a dual mission: Rebut arguments against further Fed action — and build a case for it. He echoed what the Fed said after its last policy meeting July 31-Aug. 1: that it will act, as needed, to stimulate economic growth and job creation.
Since then, somewhat better economic news had led some analysts to suggest the Fed might now feel less urgency to act. But Friday, Bernanke didn't mention any recent economic improvements.
He called the weak job market “a grave concern” that causes “enormous suffering,” wastes talent and can inflict lasting damage on the economy.
He and other Fed officials are expected to closely review the August jobs report, which comes out Sept. 7, to see how urgently the economy needs help.