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Wednesday, July 23, 2025

Bernanke: With unemployment high, Fed can do more

by

20120901

JACK­SON HOLE, Wyoming- Chair­man Ben Bernanke sent a clear mes­sage Fri­day that the Fed­er­al Re­serve will do more to help the still-strug­gling US econ­o­my. His re­marks left two ques­tions: What ex­act­ly will the Fed do? And when? Bernanke de­scribed the US econ­o­my's health as "far from sat­is­fac­to­ry" and not­ed that the un­em­ploy­ment rate, now 8.3 per cent, hasn't de­clined 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, Wyoming, Bernanke said that even with in­ter­est rates al­ready at su­per-lows, 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 some 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 mort­gage­backed 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 mid-Sep­tem­ber FOMC meet­ing," said Paul Dales, se­nior US econ­o­mist at Cap­i­tal Eco­nom­ics. Oth­ers ex­pect some­thing less dra­mat­ic: A plan to keep short­term 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 at 10 am East­ern time, the Dow Jones in­dus­tri­al av­er­age shed some of its ear­li­er gains. Then it rose more than 100 points. It closed up about 90 points, or 0.7 per cent. Bernanke ac­knowl­edged that 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 still needs help. Cen­tral banks can take "non­tra­di­tion­al" mea­sures when they've run out of con­ven­tion­al am­mu­ni­tion. And 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. The Fed orig­i­nal­ly said it ex­pect­ed to keep rates "ex­cep­tion­al­ly low" through mid-2013. It ex­tend­ed that tar­get to late 2014. And be­sides em­bark­ing on two rounds on 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 col­lec­tive­ly, such mea­sures have suc­ceed­ed. He cit­ed re­search show­ing that two rounds of QE had cre­at­ed two mil­lion jobs and ac­cel­er­at­ed US eco­nom­ic growth. Even if the Fed does act fur­ther, many an­a­lysts doubt it would make much dif­fer­ence.

In­ter­est rates, both 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, in turn, could desta­bilise the fi­nan­cial sys­tem. Bernanke con­ced­ed that non­tra­di­tion­al poli­cies car­ry risks. But he ar­gued that these risks are "man­age­able." He not­ed that in­fla­tion re­mains around two per cent de­spite "re­peat­ed warn­ings that ex­ces­sive pol­i­cy ac­com­mo­da­tion would ig­nite in­fla­tion." And he said "we have seen lit­tle ev­i­dence thus far of un­safe buildups of risk or lever­age." (AP)


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