Federal Reserve chairman Ben Bernanke appeared to remove a barrier to more stimulus measures when he told U.S. lawmakers Tuesday that deflation is currently a greater threat than inflation.
But Mr. Bernanke is waiting on more data before taking a side in the contentious debate over whether the U.S. economy would benefit from further monetary action.
Acknowledging that the Fed is split on the best course for policy, Mr. Bernanke avoided strong statements during almost three hours of testimony at the Senate banking committee on Tuesday. Instead, the Fed chief told lawmakers that the central bank action will be determined by whether the labour market recovers from its recent slide and the threat of deflation.
Admittedly, that amounts to a restatement of the Fed’s mandate to achieve “maximum” employment and price stability. But stock markets erased losses after the testimony, suggesting that at least some investors are betting the Fed will take steps to jolt the U.S. economy out of its second-quarter swoon.
A government report Tuesday showed that the consumer price index was unchanged in June. And while he needs more information to determine whether the labour market is “stuck in the mud,” the Fed chief said the sharp slowdown in hiring is explained only partly by measurement issues related to an uncharacteristically mild winter. That implies Mr. Bernanke thinks weaker economic growth is playing a role in the elevated unemployment rate, which could be grounds for new stimulus measures.
“We are looking for ways to address the weakness in the economy should more actually be needed to address the weakness in the labour market,” Mr. Bernanke said.
Many economists said new measures from the Fed, if they come, likely are several months away.
The central bank’s policy committee met only a month ago, lowering the Fed’s outlook for economic growth this year to between 1.9 and 2.4 per cent from 2.4 to 2.9 per cent earlier. Policy makers responded to the weaker forecast by extending a relatively minor stimulus measure that was set to expire. The Fed will continue selling from its stash of shorter-term assets to buy bonds that mature in six to 30 years, putting downward pressure on longer-term interest rates, through the end of the year.
The Fed’s leaders next meet to consider their policy stance for two days starting July 31. Even though hiring was soft in June, and retail sales have declined for three consecutive months for the first time since the recession, policy makers still may need more time to determine if the economy is simply in a rut or on a sliding slope, said Paul Edelstein, director of financial economics at IHS Global Insight.
That’s because several Fed officials oppose new measures, and would need hard evidence to change their positions.
Jeffrey Lacker, the president of the Richmond Fed, voted against extending the policy, known as Operation Twist, and others are skeptical about whether there’s much left for monetary policy to do when borrowing costs already are at record-low levels.
There also are widespread doubts that the Fed’s unconventional programs work. Mr. Bernanke acknowledged that economists “differ on how effective [the Fed’s] tools have been,” but said he remains confident that the Fed still has the ability to guide the economy. He said the Fed’s armoury includes creating money to purchase bonds or mortgage-backed securities, a policy knows as quantitative easing; altering the Fed’s current conditional pledge to leave the benchmark rate near zero until at least the end of 2014; lending money to banks; and cutting the interest rate the Fed pays lenders who deposit excess funds at the central bank.
“There are a range of views about the efficacy of these programs,” Mr. Bernanke said. “They shouldn’t be used lightly.”