NEW YORK – The Federal Reserve is ready to adjust monetary policy as needed, Federal Reserve Board Chairman Ben S. Bernanke told Congress Wednesday.
“… given the range of uncertainties about the strength of the recovery and prospects for inflation over the medium term, the Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate,” Bernanke told the House Committee on Financial Services according to prepared text of his semi-annual testimony, which was released by the Fed.
“Additional policy support” would be indicated if economic weakness persists and deflationary risks reemerge, Bernanke said. That support could include providing “more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels,” or further securities purchases or increasing the average maturity of Fed holdings.
Another method of support the Fed could use would be a 25-basis-point cut in the “interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally.” He noted there are “potential risks and costs” with this alternative. “However, prudent planning requires that we evaluate the efficacy of these and other potential alternatives for deploying additional stimulus if conditions warrant.”
Should the economy surprise in a positive way, an exit strategy is planned.
Bernanke termed the recovery as “moderate,” with GDP rising at an annual rate of 2.75% in the second half of 2010,and 2% in the first quarter. “Incoming data suggest that the pace of recovery remained soft in the spring. At the same time, the unemployment rate, which had appeared to be on a downward trajectory at the turn of the year, has moved back above 9%,” he noted.
But he termed the recent weakness to “several factors that are likely to be temporary,” including energy and food prices, and suggested the recovery will pick up in the near future.
