published Friday, August 24th, 2012

Ben Bernanke says there's room for Fed to act further

WASHINGTON - Federal Reserve Chairman Ben Bernanke makes clear in a letter to a House lawmaker that he thinks the Fed can do more to bolster the economic recovery and help reduce unemployment.

Bernanke also defends steps the Fed has already taken.

"There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery," Bernanke says in the letter, which responds to questions posed by California Rep. Darrell Issa, a Republican.

Issa is chairman of the House Committee on Oversight and Government Reform.

Bernanke notes in the letter that with interest rates already at record lows, the Fed has had to deploy other means to strengthen the economy, such as buying bonds. The goal of the bond purchases has been to lower rates to encourage borrowing and spending.

At its last policy meeting, the Fed had signaled a growing inclination to act further to help the economy.

Stocks reversed their losses Friday after the letter was reported by The Wall Street Journal.

The Fed already has completed two programs aimed at driving down interest rates to encourage more borrowing and spending. It bought more than $2 trillion in Treasurys and mortgage-backed securities, expanding its balance sheet above $2.8 trillion.

The central bank has been running a program for nearly a year in which it sells short-term Treasurys and buys longer-term Treasurys. The program, called Operation Twist, will run through the end of the year and shift $667 billion from short-term to longer-term Treasurys.

Asked by Issa about the impact of that program, Bernanke says its initial phase "is still working its way through the economic system."

Because it takes time for interest-rate policy actions to have an effect, Bernanke says the Fed's policies depend on the expected future performance of the economy.

He rejects suggestions that the Fed is subject to political pressure that would limit its ability to raise rates to tame inflation, should prices get out of control. Bernanke says that as an independent agency, the Fed "will be steadfast in its adherence to the task of promoting the dual mandate given by the Congress - to promote price stability and maximum sustainable employment."

Many analysts are looking to a speech by Bernanke late next week at an annual Fed conference in Jackson Hole, Wyo., to provide further guidance on any new actions.

Even if the Fed launched a third round of bond purchases, few think that further lowering long-term rates would provide much benefit to the U.S. economy. Most businesses and consumers who aren't borrowing now aren't likely to change their minds if rates slipped a bit more.

One voting member of the Fed's policy committee told The Associated Press last week that the Fed's power to fix the U.S. economy is limited now. Jeffrey Lacker, head of the Federal Reserve Bank of Richmond, said the Fed can only do so much to lower the 8.3 percent unemployment rate. Lacker alone has dissented from the past five Fed statements that sketched out steps intended to bolster the economy.

The minutes of the Fed's most recent policy meeting, released this week, suggested that it might be ready to launch a new bond buying program as soon as its next meeting Sept. 12-13.

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