Facing a mutiny in financial markets, U.S. Federal Reserve chairman Ben Bernanke emerged on deck to steady the ship, making it clear that he is prepared to do whatever it takes to avoid a slide back into recession.
Addressing some of the world’s leading central bankers and economists at their annual gathering in Jackson Hole, Wyo., Mr. Bernanke acknowledged that the recovery in the United States is straining against considerable headwinds from high unemployment and an extremely weak housing market.
Less than two hours before Mr. Bernanke delivered his highly anticipated speech on Friday, the Commerce Department revised its reading of gross domestic product growth in the second quarter to an annual rate of 1.6 per cent, down from a previous estimate of 2.4 per cent.
The weaker data, the result of slower growth in inventories and a wider trade deficit, added to the already considerable pressure on Mr. Bernanke to explain the central bank’s action plan for the economy.
“One of the things that is holding back the economy is the considerable degree of uncertainty on what policy will be, including monetary policy,” John Taylor, an economics professor at Stanford University and former senior U.S. Treasury official, said in an interview with Bloomberg Television from Jackson Hole. “It would be a good stimulus, if you like, to remove a lot of that uncertainty, to clarify what policy is going to be, remove some of the disagreements.”
Mr. Bernanke insisted the Fed has more options, such as buying financial assets, to stimulate the economy if needed. And he said his faith in a longer-term rebound remains firm.
“Despite the weaker data seen recently, the preconditions for a pick-up in growth in 2011 appear to remain in place,” Mr. Bernanke said. “Stronger household finances, rising incomes and some easing of credit conditions will provide the basis for more-rapid growth in household spending next year.” Still, the prospect of protracted high unemployment and the threat that economy’s current struggles could cause a corrosive decline in prices and wages are “central” concerns, he said.
Some critics say the Fed is running out of ammunition to turn the economy around if things get worse. The Fed dropped its benchmark interest rate to near zero in December, 2008, and more than doubled its balance sheet to more than $2-trillion (U.S.), buying financial assets to keep downward pressure on lending rates. Mr. Bernanke accepted that the options that remain available to him are untested, making the decision to deploy them more difficult. But that doesn’t mean the Fed’s policy-setting committee is unprepared to do so.
Mr. Bernanke provided a detailed analysis of three options to stimulate growth if conditions continue to worsen: creating money to buy financial assets, or quantitative easing; providing consumers, executives and investors with more clarity on how long interest rates would remain low; and dropping the 0.25 per cent paid on deposits at the Fed, which some say would push banks to lend.
Of the three, Mr. Bernanke appeared to lean toward further quantitative easing, saying the purchase of U.S. government debt forces private investors to seek out other investments, further lowering interest rates across the spectrum.
“He is not on the verge of doing anything,” Prof. Blinder told Bloomberg Radio. “I thought he was relatively pessimistic about the efficacy of the actions.”
