Fed ready to take 'unconventional measures'

By Hibah Yousuf, staff reporter


NEW YORK (CNNMoney.com) -- Federal Reserve chairman Ben Bernanke bluntly acknowledged that the U.S. economic recovery has lost considerable steam, but said the central bank has the necessary policy tools to support continued growth.

"The issue at this stage is not whether we have the tools to help support economic activity and guard against inflation," Bernanke said at the Fed annual symposium in Jackson Hole, Wyo. "We do."

Making his first public comments since the central bank announced it would buy additional long-term Treasurys to boost the recovery, Bernanke said that the pace of economic growth is "somewhat less vigorous" than expected, but remained optimistic for a pickup in 2011.

Bernanke reiterated that the Fed would reinvest in Treasurys to maintain the size of its balance sheet, and added that the bank is prepared to provide additional "unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly."

Earlier Friday, the government lowered its reading of second-quarter economic activity to an annualized growth rate of 1.6%, down sharply from the 2.4% previously estimated.

Bernanke said the Fed will continue to monitor developments in the economy and evaluate other options to try and reverse the slowing momentum.

He said the Fed could purchase additional longer-term securities beyond Treasurys, since that was an effective strategy earlier. But he warned there are risks that the move would increase concerns about the Fed's so-called exit strategy.

Bernanke said the central bank could also modify its "extended period" language to communicate that the Fed would hold rates low for a "longer period than is currently priced in markets."

He added that the Fed could decrease the interest rate it pays to banks that keeps their excess reserves at the central bank in order to give banks more incentive to increase lending. But Bernanke warned the effect of that move alone would be relatively small.

"Bernanke now appears willing to discuss all the central bank's options for introducing further policy stimulus, but doesn't seem entirely convinced that they would necessarily be effective," said economist Paul Ashworth of Capital Economics in a statement, adding that additional actions from the Fed shouldn't be expected any time soon.

But that could be because those measures aren't necessary yet, said Dean Croushore, chair of the economics department at the University of Richmond and a former economist the the Federal Reserve Bank of Philadelphia.

"Bernanke wanted to lay out the possibilities in case things get a lot worse, but at the same time, all the talk about a double-dip recession is overblown and based on a couple of noisy data points," said Croushore, who was a Fed economist for 14 years.

Bernanke said the central bank has not agreed on specific criteria that would prompt action, but Croushore said it would take at least a few months of consistently downbeat data, particularly in the job market, before the Fed would pull the trigger.

Bernanke also addressed the Fed's critics who argue that the central bank should increase its inflation goals, adding that there is "no support" for this option at the Fed because the risk of an "undesirable rise in inflation" seems low.

But Bernanke also rejected concerns about deflation, saying that risks are not "significant" now.

The initial comment about raising inflation goals spooked investors and sent stocks into a temporary decline, but markets later turned up as investors digested the remainder of Bernanke's comments.

"He quickly dismissed the proposal and confirmed that the Fed stands for low inflation," Croushore said. "He also proved that the Fed still has bullets and is in control, which has been helpful to markets."

But Croushore said that the economic outlook remains uncertain. So investors will remain on edge and focus on each incoming data point for more direction.  To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 18,081.81 57.64 0.32%
Nasdaq 4,786.71 21.29 0.45%
S&P 500 2,087.05 4.88 0.23%
Treasuries 2.29 0.03 1.51%
Data as of Dec 24
Company Price Change % Change
Bank of America Corp... 18.04 0.12 0.64%
Gilead Sciences Inc 92.34 2.89 3.23%
General Electric Co 25.71 -0.17 -0.66%
Cisco Systems Inc 28.57 0.32 1.13%
Apple Inc 112.22 -0.32 -0.28%
Data as of Dec 24

Sections

JetBlue is offering to fly police to New York for the funeral of slain NYPD officers and is working to have the family of one of the officers flown in from overseas. More

Many Americans are buying more gifts -- and more expensive gifts -- for Christmas. That's squeezing some in the middle class. More

According to data from Google Trends and GrubHub, Chinese food remains the most popular type of food order on Christmas. More

If you're looking to sell your holiday gift cards for cold hard cash... there's an app for that. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.