Bernanke: Fed would supply more stimulus if needed

[July 14, 2011]  WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke said Wednesday that the central bank is prepared to provide additional stimulus if the current economic lull persists.

Delivering his twice-a-year economic report to Congress, Bernanke laid out three options the central bank would consider.

Bernanke said the Fed could launch another round of Treasury bond buying, the third such effort since 2009. It could cut the interest paid to banks on the reserves they hold as a way to encourage them to lend more.

The Fed could also be more explicit in spelling out just how long it planned to keep rates at record-low levels. That would give investors confidence about the Fed's efforts to continue supporting the economy.

Bernanke maintained that temporary factors, such as high food and gas prices, have slowed the economy. He said they should ease in the second half of the year. But if that forecast proves to be wrong, he said the Fed is prepared to do more.

"The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support," Bernanke told the House Financial Services Committee on the first of two days of Capitol Hill testimony.

Bernanke also said it was possible that inflationary pressures spurred by higher energy and food prices may prove more persistent than the Fed is forecasting. He said that the central bank would be prepared to start raising interest rates faster than currently contemplated.

Most private economists believe the Fed will not start raising interest rates until next summer. And some say the Fed won't increase rates until 2013, based on the slumping economy.

Bernanke was testifying after the government released a dismal jobs report last week and after the Fed last month lowered its forecast for economic growth for the rest of the year.

The economy added just 18,000 jobs last month, the fewest in nine months. And the May figures were revised downward to show just 25,000 jobs added -- fewer than half of what was initially reported. The unemployment rose to 9.2 percent, the highest rate this year.

Companies pulled back sharply on hiring after adding an average of 215,000 jobs per month from February through April. The economy typically needs to add 125,000 jobs per month just to keep up wiht population growth. And at least twice that many jobs are needed to bring down the unemployment rate.

At the June meeting, the central bank lowered its economic growth forecast for the second half of the year and said unemployment wouldn't fall below 8.6 percent this year.

The Fed also agreed at that meeting to end on schedule its program to boost the economy through the purchase of $600 billion in Treasury bonds.

The bond-buying program was the Fed's second round of "quantitative easing." That's a term economists use for a tool the Fed can use to drive down long-term interest rates by purchasing Treasury bonds.

[Associated Press; By MARTIN CRUTSINGER]

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.