US FEDERAL Reserve chairman Ben Bernanke has hinted that the central bank will do more to support the stalling US economy, saying that the Fed “is prepared to employ its tools as appropriate to promote a stronger recovery” and will extend its September monetary policy meeting “to allow a fuller discussion”.
But in his annual speech to a Fed gathering in Jackson Hole, Wyoming, Mr Bernanke avoided the emphatic language he used in a similar speech last year and offered no detailed discussion of the Fed’s easing options.
That suggests the Fed is unlikely to launch a third round of quantitative easing – nicknamed QE3 – unless the economic situation gets substantially worse.
“The Federal Reserve has a range of tools that could be used to provide additional monetary stimulus,” he said. “We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September.”
Investors initially reacted poorly to the speech but took heart at the possibility of further Fed action, with the SP 500 index rallying to trade up 1.2 per cent by midday.
“There’s still some pricing in of more monetary policy action in the near-term,” said Ian Lyngen, senior government bond analyst at CRT Capital. “Markets seem to be thinking there will be no ‘QE’ today, but perhaps there will be after the extended meeting in September.”
In a further sign of US economic weakness, estimates of second-quarter growth were revised down from an annualised rate of 1.3 per cent to 1 per cent.
Mr Bernanke also expressed alarm about long-term unemployment, saying that it could leave a “major scar” on the US economy.
He criticised fiscal policymakers, suggesting their arguments about the debt ceiling had harmed growth.
“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.”
Markets are focusing on the economic policy speech President Barack Obama will make after the US Labour Day holiday in September.
Mr Bernanke said recent data suggested that first-half growth was slower than expected, noting that “temporary factors can account for only a portion of the economic weakness that we have observed”. He added that the Fed had cut its growth forecasts and expected inflation to fall to a level at or below its target.
The Fed chairman clarified the Fed’s guidance that short-term interest rates were likely to remain exceptionally low until mid-2013, saying it was the most likely outcome, not a certainty. – (Copyright The Financial Times Limited 2011)
