WASHINGTON - Federal Reserve Chair Ben Bernanke said Thursday policymakers have not yet decided if further monetary stimulus is needed to support what appears to be a stuttering U.S. economic recovery, not have they settled on what form any potential support would take.
Members of the Fed's policymaking Federal Open Market Committee must now ponder whether economic activity will expand at a sufficient enough pace in the future to achieve a continued and "material progress" on the jobs front, Bernanke said at a hearing before the Joint Economic Committee.
Bernanke stressed that Fed officials have not yet reached the conclusion that additional monetary accommodation is required or what measures will be implemented.
"We have made no decisions," he said. "I wouldn't want to take anything off the table at this juncture.
"If we decide that further action is required, then of course we also have to decide what action is appropriate or what communication is appropriate," Bernanke said.
The Fed does have options it can consider, but Bernanke cautioned that it will also have to make some "difficult assessments" regarding the effectiveness of each option, "and whether there are costs and risks associated with those steps that would outweigh the benefits they might achieve."
Asked about potential risks associated with another round of quantitative easing, Bernanke said given the Fed's limited experience with that approach, "our understanding of its efficacy, and exactly how much is needed, are less than the traditional monetary policy."
But before the FOMC decides more monetary stimulus is needed and what form it should take, "the main question we have to address has to do with the likely strength of the economy going forward," he said.
In his prepared testimony, Bernanke said the slowdown in employment seen in recent months may be because the larger gains seen late last year and early this year "were associated with some catch-up in hiring on the part of employers who had pared their workforces aggressively during and just after the recession."
He later told lawmakers that if this analysis is correct then, in order to see continued improvement in employment and a lower jobless rate going forward, "we'll need to see growth at or above the trend rate of growth (2% to 2.5%)."
That is the essential question monetary policymakers will have to answer when the Federal Open Market Committee meets June 19-20, Bernanke said: "Will there be enough growth going forward to make material progress on the unemployment rate."
The FOMC also will have to take the outlook for inflation into account, he added.
With interest rates already so low, Bernanke was asked if he believed further action by the Fed could achieve additional monetary accommodation.
He said the fact rates are low will be a consideration in FOMC deliberations, but, "I do think that we do have tools that would allow us to get further accommodation in the economy and provide some support."
He stated his preference for a broad-based policy response to tackling the nation's economic struggles, with greater support from fiscal policy.
"I would be much more comfortable if in fact Congress would take some of this burden from us," Bernanke said.
Bernanke also defended the Fed's previous quantitative easing programs, arguing they lowered interest rates, mortgage rates, and raised stock prices, raising the wealth effects for consumers.
While the effects of recent programs have been less powerful, compared to those implemented during the depths of the financial crisis, Bernanke said "these sorts of measures could still add some additional accommodation, some additional support to the economy."
However, he acknowledged there may be "diminishing returns" from future rounds of quantitative easing, something the Fed would have to consider if it makes the decision to reach into its toolkit once again.
The Fed has had to resort to unorthodox measures to support the recovery because it has already slashed interest rates close to zero, and has said rates could remain at those levels at least through 2014.
Bernanke told the committee that while rates are expected to normalize over time, the exact timing is very difficult to judge "because it depends very much on the recovery of the economy."
"While we see the economy moving in a moderate pace -- in the right direction -- the point at which we are comfortable that it's time to withdraw monetary stimulus is obviously quite uncertain," he said.
On the subject of the price stability, Bernanke said the Fed's explicit 2% target means the central bank does not want inflation above or "well below" that mark.
But, "we think deflation, at this point, is a probably a pretty low probability risk," Bernanke said, adding that "at the moment inflation seems to be pretty stable."
Deflation is not the main concern, he said, rather it is "promoting adequate growth to continue to bring down employment over time."
Some believe significantly expanding the Fed's balance sheet would complicate the central bank's eventual exit strategy and make inflation more likely.
Bernanke sought to reassure lawmakers, however, telling them "we are very confident that we can exit in a timely way from our balance sheet strategy and there is in fact no justification for such a concern."
"We are very confident that we have the technical tools to bring the balance sheet down to a more normal level ... when we decide it is time tighten monetary policy," he said.
The Fed is "quite comfortable" with the technical aspects of its exit strategy, Bernanke said, but the timing of the withdrawal will be difficult. "It's always possible that you could either undershoot or overshoot, and that's unavoidable."
Bernanke singled out the still-depressed housing market as a drag on the recovery, but noted that the sector "looks to be stabilizing, which, if true, would be good news."
He refused to be drawn into the debate on principal reduction of mortgage loans for struggling homeowners, however, saying the Federal Reserve Board has not taken an official position on the subject.
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