Bernanke: Fed wrestling with size of program to buy Treasury
The Federal Reserve is prepared to take further steps to rejuvenate
the economy by buying Treasury bonds but is wrestling with how big
the program should be, Chairman Ben Bernanke said Friday.
Bernanke also indicated that Fed policymakers are trying to craft a
plan to lift inflation from super-low levels. He made his remarks
in a speech delivered to a Fed conference in Boston.
Bernanke said the Fed must weigh the risks of a Treasury-buying
program and determine how the debt purchases would be paced. The
Fed's bond purchases would be intended to lower long-term interest
rates to stimulate buying and spending and help lower
Fed policymakers are widely expected to announce a Treasury buying
program at their next meeting Nov. 2-3.
"There would appear -- all else being equal -- to be a case for
further action," Bernanke said.
World stocks rose after Bernanke's remarks. But the prospect of
more dollars swirling around the financial system did nothing to
help the dollar itself, which slid further after the Fed chief
The economy is growing at a pace "less vigorous than we would
like," Bernanke acknowledged.
Unemployment, now at 9.6 percent, has been stuck near double digits
for more than a year. Bernanke indicated that the Fed is concerned
that economic growth is likely to remain lackluster and that
unemployment will decline only slowly next year. High unemployment
is likely to keep consumers cautious in their spending.
During the recession, the Fed launched a $1.7 trillion program,
buying a mix of mortgage securities and government debt. The effort
was credited with forcing down mortgages rates and providing
support to the weakened housing market. The new program is likely
to be smaller. One Fed official has suggested a $500 billion
program, while another has suggested it be $100 billion or
The Fed is again resorting to such unconventional methods -- called
quantitative easing -- to stimulate the economy because it has
already sliced its key interest rate to a record low near zero. The
anticipated second round is being dubbed quantitative easing
"Bernanke gives green light for QEII," TJ Marta, a market
strategist at Marta on the Markets, said after Bernanke's
For now, the Fed is more interested in seeing prices rise-- rather
Because the economy is weak, "the risk of deflation is higher than
desirable," Bernanke said. Deflation is a widespread drop in
prices, wages and the values of stocks and homes.
As Bernanke was speaking, the government issued a report that
pointed to why a new Treasury-buying program may be necessary to
ward off deflation. Consumer prices excluding the volatile
categories of food and energy were flat or a second straight
A prolonged drop in prices for goods, for wages and in the values
of homes and stocks is dangerous for the economy and Americans'
pocketbooks. It makes paying on debt much harder, causing more
people to fall into foreclosures, default on credit card bills and
companies to slide into bankruptcy.
Bernanke's comments come as the Fed is weighing steps to try to
raise people's expectations of where they think inflation is
heading in the months ahead.
If the Fed were to communicate that it will tolerate a
higher-than-normal rate of inflation, that could make companies
feel more inclined to nudge up their prices. Shoppers, thinking
prices would be rising even further in the future, would be more
inclined to make purchases sooner. That would lift inflation from
worrisome low levels.
Such a move would push "real" or inflation-adjusted interest rates,
down, which could spur more spending. Fed officials at the
September meeting noted that it has ways to try to influence
people's expectations of inflation. One way was to include
information in the minutes of the Fed meetings to try to shape
people's expectations about inflation.
Addressing the nation's high unemployment, Bernanke believed much
of that problem was due to the sharp contraction in business
activity that occurred in the wake of the financial crisis and a
lack of customer demand since then.
Some economists have argued that unemployment is high because of
two primary factors. Workers face difficulties moving to new cities
where jobs may be available, mostly because they worry about being
able to sell their homes in depressed housing markets. They also
note a mismatch between the skills workers have and the ones
Written by: Jeannine Aversa, AP Economics Writer