Bernanke won’t rule out more bond buying to lift economy

BERNANKE DEFENDS THE FED The Fed’s policy of keeping its benchmark rate near zero helps support an economy that’s healing but still hurting, he says. BERNANKE DEFENDS THE FED
The Fed’s policy of keeping its benchmark rate near zero helps support an economy that’s healing but still hurting, he says.
By Scott Lanman and Joshua Zumbrun
Bloomberg News / March 3, 2011

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WASHINGTON — Federal Reserve chairman Ben S. Bernanke does not rule out expanding central bank asset purchases to stimulate the economy, saying he does not want the country to lapse into recession again.

Asked at a House Financial Services Committee hearing yesterday what would warrant a third round of so-called quantitative easing, he said: “What we’d like to see is a sustainable recovery. We don’t want to see the economy falling back into a double dip or to a stall-out.’’

That signaled he will keep the Fed on course to complete $600 billion of Treasury purchases through June under the second round of quantitative easing, a policy criticized by Republicans as risking an inflationary surge. He has not said what the central bank may do after that.

A third round of purchases “has to be a decision’’ of the Federal Open Market Committee, and “depends again on our mandate’’ for stable prices and maximum employment, Bernanke told Texas Representative Jeb Hensarling, a critic of QE2.

“We’re looking very closely at inflation both in terms of too low and too high,’’ Bernanke said. “I want to be sure that you understand that I am very attentive to inflation and potential risks for inflation.’’

Bernanke also said the Fed’s policy of keeping its benchmark rate near zero for an “extended period’’ helps provide support to the economy.

“The economy’s recovery is not firmly established, and we think monetary policy needs to be supportive,’’ he said.

The second round of bond-buying follows a $1.7 trillion first round of purchases of mortgage-backed debt and Treasuries.

Since August, when Bernanke signaled the Fed might buy securities to stimulate the economy, “downside risks to the recovery have receded, and the risk of deflation has become negligible,’’ he said in testimony this week.

Many of the questions Bernanke fielded dealt with the outlook for the federal budget deficit, giving the Fed chief an opportunity to reiterate his call for Congress to come up with a long-term plan for reining in the national debt. The House passed a bill last month that would cut $61 billion from 2011 government spending.

“QE2 has given us some opportunity to act on our debt and deficit, and we have not taken advantage of that,’’ the panel’s chairman, Spencer Bachus, an Alabama Republican, said at yesterday’s hearing.

Bernanke got caught up in a debate over the extent to which House spending cuts would result in job losses. He said the reductions may lead to about 200,000 fewer jobs over the next couple of years. That compares with the prediction of Mark Zandi, chief economist at Moody’s Analytics, that the budget reductions would mean 700,000 fewer jobs by the end of 2012.

Inflation is likely to remain low through 2013, Bernanke said in Senate testimony Tuesday.

The job market has improved slowly, and it may take “several years’’ for the jobless rate to reach a “more normal level.’’ And “the housing sector remains exceptionally weak.’’