NEW YORK – The Federal Reserve Board realizes that further monetary policy accommodation could be needed in the future and the Fed is prepared to take “unconventional measures” if needed because the economic outlook deteriorated “significantly,” Fed Chairman Ben S. Bernanke said Friday.
Noting “economic recovery and repair remains far from complete,” Bernanke pointed to weak economic growth and high unemployment, and while financial conditions are generally greatly improved, bank credit is still tight and “much of the work of implementing financial reform lies ahead of us,” Bernanke told the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole, Wyo., according to prepared text of the speech released by the Fed. “Managing fiscal deficits and debt is a daunting challenge for many countries, and imbalances in global trade and current accounts remain a persistent problem.”
He said the FOMC “is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly. The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation,” he said. The question is “whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.”
The economy, Bernanke said, is “vulnerable to unexpected developments. ... we have come a long way, but there is still some way to travel.”
With so many questions, Bernanke said, policymakers need to offer “appropriate and effective responses” to spur economic growth. But central bankers will need guidance from the private sector since “Central bankers alone cannot solve the world's economic problems.”
Consumer spending and business investment must drive a recovery because “fiscal impetus and the inventory cycle” are only limited-term fixes. “On the whole, in the United States, that critical handoff appears to be under way,” Bernanke said. Labor market data “remained disappointing.”
Recent data indicate “the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year,” he said, attributing it to slowed consumer spending and lack of demand for housing. “Consumer spending may continue to grow relatively slowly in the near term as households focus on repairing their balance sheets. I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace,” he said.
In 2011, however, a pickup in growth is expected. “Monetary policy remains very accommodative, and financial conditions have become more supportive of growth, in part because a concerted effort by policymakers in Europe has reduced fears related to sovereign debts and the banking system there,” Bernanke said. “Banks are improving their balance sheets and appear more willing to lend. Consumers are reducing their debt and building savings, returning household wealth-to-income ratios near to longer-term historical norms. Stronger household finances, rising incomes, and some easing of credit conditions will provide the basis for more-rapid growth in household spending next year.”
Business spending on equipment and software, Bernanke predicted, would be “healthy” next year, but resource slack and unemployment may slowly decline.
Inflation is slightly below target for a healthy economy, and should remain so “for some time before rising slowly toward levels more consistent with the Committee's objectives,” Bernanke said, noting the Fed will closely monitor “, the risk of either an undesirable rise in inflation or of significant further disinflation,” which seem low at this point.
If further monetary accommodation is needed, the Fed has several stimulus tools including “conducting additional purchases of longer-term securities, modifying the Committee's communication, and reducing the interest paid on excess reserves,” and the FOMC increasing its inflation goals.
The Fed buying more longer-term securities “would be effective in further easing financial conditions,” he said. “However, the expected benefits of additional stimulus from further expanding the Fed's balance sheet would have to be weighed against potential risks and costs.” Part of the Fed’s concern is lack of experience means “we do not have very precise knowledge of the quantitative effect of changes in our holdings on financial conditions.”
Bernanke said the FOMC could “ease financial conditions through its communication, for example, by modifying its post-meeting statement” by changing the "for an extended period" to the FOMC “anticipates keeping the target for the federal funds rate low for a longer period than is currently priced in markets. Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations.”
The negative side of using the FOMC statement is “without a more comprehensive framework in place, it may be difficult to convey the Committee's policy intentions with sufficient precision and conditionality.”
Lowering the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System would have only a minor impact, Bernanke said. The FOMC could raise “its medium-term inflation goals above levels consistent with price stability,” which Bernanke said is not backed by members, since it would work best after a “prolonged period of deflation had greatly weakened the confidence of the public in the ability of the central bank to achieve price stability, so that drastic measures were required to shift expectations.”
