U.S. Federal Reserve Chairman Ben S. Bernanke left the door open to a fresh shot of monetary stimulus should the economic rebound he’s predicting fail to materialize.
The Fed would be "prepared to take additional action, obviously, if conditions warranted," including the purchase of more Treasury securities, Bernanke said yesterday after U.S. central bankers met in Washington.
The economy will probably overcome constraints from elevated energy prices and Japan-related disruptions to manufacturing, he said. Still, declining home prices, high unemployment and weaknesses in the financial system may restrain the recovery in the longer term, he said.
Policy makers in a statement yesterday acknowledged the slowdown even as they agreed to complete $600 billion U.S. in bond-buying as scheduled this month in the second round of so-called quantitative easing. While the outlook for employment and inflation is better than before the latest bond purchases, Bernanke said he’s not sure how long the economic headwinds will persist. Stocks fell in New York trading.
"Bernanke’s remarks kept that door open" to more bond buying, said former Fed Governor Lyle Gramley, currently senior economic adviser at Potomac Research Group in Washington. "The hurdle for QE3 is obviously high. But if large downside risks materialize and the economy slows enough so that the unemployment rate starts to increase again, QE3 would have to be considered."
One of those risks is a debt default by Greece, which could "roil financial markets globally," including bonds and stocks, and potentially have a "quite significant" impact in the U.S., Bernanke told reporters at his second post-meeting press conference.
The U.S. economy grew at an annual rate of 1.8% in the first quarter, down from 3.1% in the fourth quarter, and recent data have shown manufacturing and consumer and business sentiment weakening.
"We don’t have a precise read on why this slower pace of growth is persisting," Bernanke said. Referring to "frustratingly" slow job growth and weakness in the financial and housing industries, Bernanke said “some of these headwinds may be stronger and more persistent than we thought.”
U.S. employers added 54,000 jobs in May, down from 232,000 in April, while the jobless rate climbed to 9.1%, the second straight increase after dropping one percentage point since November in the biggest four-month decline since 1984.
Bernanke said that to further stimulate the economy the Fed could buy more bonds or cut the interest rate it pays banks on excess reserves held at the central bank. It could also pledge to hold interest rates at record lows for a longer period of time, he said.
The Fed, in a unanimous decision yesterday, left its benchmark interest rate in a range of zero to 0.25%, where it’s been since December 2008.
