Bernanke Says Fed Ready To Respond If Necessary

The Federal Reserve is ready to adjust monetary policy as needed, chairman Ben 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 semiannual testimony released by the Fed.

“Additional policy support” would be indicated if economic weakness persists and deflationary risks reemerge, according to Bernanke.

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, he said.

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.”

The Fed chairman 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,” Bernanke said.

Should the economy surprise in a positive way, an exit strategy is planned, he added.

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