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Bernanke Offers No Plan for New Stimulus

Friday, 26 August 2011 06:21 By Binyamin Appelbaum, The New York Times | Report
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Jackson Hole, Wyoming - The Federal Reserve chairman, Ben S. Bernanke, said Friday that the economy was recovering and the nation’s long-term prospects remained strong, an upbeat assessment that offered little indication of any plans for additional measures to bolster short-term growth.

Mr. Bernanke’s much-anticipated remarks follow the Fed’s announcement earlier this month that it intended to hold short-term interest rates near zero until at least the middle of 2013, a reflection of its view that growth will not be fast enough during that period to drive up wages and prices.

“With respect to longer-run prospects, however, my own view is more optimistic,” Mr. Bernanke said in his prepared remarks. “The growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years.”

Mr. Bernanke was careful to note that the nation faces significant challenges, including high unemployment and an unsustainable federal debt. But the speech, delivered at a policy conference held each August in Grand Teton National Park, marked a return to the Fed’s position earlier this year that the Fed has done most of what it can, and that the rest of the government must do more.

Indeed, Mr. Bernanke devoted much of his speech to fiscal policy, rather than the monetary policy that is the Fed’s primary responsibility. And he offered an unusual critique of the government’s handling of those issues.

“The country would be well-served by a better process for making fiscal decisions,” he said, noting that the political battle over raising the debt-ceiling had disrupted the financial markets “and probably the economy as well.”

Mr. Bernanke suggested a different process, involving “clear and transparent budget goals, together with budget mechanisms to establish the credibility of these goals.”

The conference, held each August at a resort in Jackson Hole, has become a key event on the Fed’s annual calendar, in part because Mr. Bernanke and his predecessors have made a habit of coming here to clarify their views and intentions.

Last year Mr. Bernanke used his remarks to provide the first clear indication that the Fed intended to launch a second round of asset purchases. The Fed went on to buy $600 billion in Treasury securities between November and June, increasing its total portfolio of Treasuries and mortgage securities to more than $2.5 trillion.

This year’s speech offered little if any indication that something similar is in store. Mr. Bernanke made his standard announcement that the Fed would take any steps necessary to help the economy, and he said the issue would be discussed at the next meeting of the Fed’s policy-making board, in late September. But noticeable by its absence was a list of the measures the Fed might take, something Mr. Bernanke has provided on several occasions earlier this year.

“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” he said.

The Fed is operating in an unusually charged political environment. Several Republican candidates for president have sharply criticized the Fed’s existing efforts and expressed disapproval of any new steps. Mr. Bernanke opened the conference Wednesday night with a brief speech, during which he mentioned that he had attended a rodeo with his wife earlier this week. The announcer, he said, asked the crowd to sing the national anthem even though many of them were angry about decisions made by people in Washington.

Mr. Bernanke has previously described other steps that the Fed could take. Perhaps the most modest would be a similar commitment to maintain the size of the Fed’s investment portfolio for a fixed period. The central bank has accumulated more than $2 trillion in low-risk mortgage securities and Treasuries in an effort to reduce longer-term interest rates and to push investors to buy riskier assets, such as stocks and corporate debt.

A related but more aggressive step would involve changing the kinds of assets that the Fed owns while maintaining the size of the portfolio. By selling bonds that mature in the near future, and buying bonds with more distant maturities, the Fed might be able to increase the downward pressure it is exerting on longer-term rates.

The most dramatic option available to the central bank would be an announcement that it intends to increase the total size of the portfolio. This is what markets refer to as “QE3,” meaning that it would represent a third round of the strategy known as quantitative easing.

There are other actions the Fed could take that are not directly related to its portfolio. The central bank pays interest on the reserves that banks keep on deposit with the Fed. Reducing those rates, an option Mr. Bernanke and others have mentioned, could give banks a greater incentive to lend. But banks already are awash in cash and most economists — including Fed officials — doubt the utility of such a step.  


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