WASHINGTON (MNI) – The following is an op ed article being
published in The Washington Post Thursday, titled “Aiding the economy:
What the Fed did and why:”

by Ben S. Bernanke

Two years have passed since the worst financial crisis since the
1930s dealt a body blow to the world economy. Working with policymakers
at home and abroad, the Federal Reserve responded with strong and
creative measures to help stabilize the financial system and the
economy. Among the Fed’s responses was a dramatic easing of monetary
policy — reducing short-term interest rates nearly to zero. The Fed
also purchased more than a trillion dollars’ worth of Treasury
securities and U.S.-backed mortgage-related securities, which helped
reduce longer-term interest rates, such as those for mortgages and
corporate bonds. These steps helped end the economic free fall and set
the stage for a resumption of economic growth in mid-2009.

Notwithstanding the progress that has been made, when the Fed’s
monetary policymaking committee — the Federal Open Market Committee
(FOMC) — met this week to review the economic situation, we could
hardly be satisfied. The Federal Reserve’s objectives — its dual
mandate, set by Congress — are to promote a high level of employment
and low, stable inflation. Unfortunately, the job market remains quite
weak; the national unemployment rate is nearly 10 percent, a large
number of people can find only part-time work, and a substantial
fraction of the unemployed have been out of work six months or longer.
The heavy costs of unemployment include intense strains on family
finances, more foreclosures and the loss of job skills.

Today, most measures of underlying inflation are running somewhat
below 2 percent, or a bit lower than the rate most Fed policymakers see
as being most consistent with healthy economic growth in the long run.
Although low inflation is generally good, inflation that is too low can
pose risks to the economy — especially when the economy is struggling.
In the most extreme case, very low inflation can morph into deflation
(falling prices and wages), which can contribute to long periods of
economic stagnation.

Even absent such risks, low and falling inflation indicate that the
economy has considerable spare capacity, implying that there is scope
for monetary policy to support further gains in employment without
risking economic overheating. The FOMC decided this week that, with
unemployment high and inflation very low, further support to the economy
is needed. With short-term interest rates already about as low as they
can go, the FOMC agreed to deliver that support by purchasing additional
longer-term securities, as it did in 2008 and 2009. The FOMC intends to
buy an additional $600 billion of longer-term Treasury securities by
mid-2011 and will continue to reinvest repayments of principal on its
holdings of securities, as it has been doing since August.

This approach eased financial conditions in the past and, so far,
looks to be effective again. Stock prices rose and long-term interest
rates fell when investors began to anticipate this additional action.
Easier financial conditions will promote economic growth. For example,
lower mortgage rates will make housing more affordable and allow more
homeowners to refinance. Lower corporate bond rates will encourage
investment. And higher stock prices will boost consumer wealth and help
increase confidence, which can also spur spending. Increased spending
will lead to higher incomes and profits that, in a virtuous circle, will
further support economic expansion.

While they have been used successfully in the United States and
elsewhere, purchases of longer-term securities are a less familiar
monetary policy tool than cutting short-term interest rates. That is one
reason the FOMC has been cautious, balancing the costs and benefits
before acting. We will review the purchase program regularly to ensure
it is working as intended and to assess whether adjustments are needed
as economic conditions change.

Although asset purchases are relatively unfamiliar as a tool of
monetary policy, some concerns about this approach are overstated.
Critics have, for example, worried that it will lead to excessive
increases in the money supply and ultimately to significant increases in
inflation.

Our earlier use of this policy approach had little effect on the
amount of currency in circulation or on other broad measures of the
money supply, such as bank deposits. Nor did it result in higher
inflation. We have made all necessary preparations, and we are confident
that we have the tools to unwind these policies at the appropriate time.
The Fed is committed to both parts of its dual mandate and will take all
measures necessary to keep inflation low and stable.

The Federal Reserve cannot solve all the economy’s problems on its
own. That will take time and the combined efforts of many parties,
including the central bank, Congress, the administration, regulators and
the private sector. But the Federal Reserve has a particular obligation
to help promote increased employment and sustain price stability. Steps
taken this week should help us fulfill that obligation.

** Market News International Washington Bureau: 202-371-2121 **

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