By Steven K. Beckner

WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke left no
doubt Wednesday that he and a majority of his fellow policymakers are
prepared to resort to more quantitative easing under certain
circumstances — possibly even if inflation is running above the Fed’s
newly announced 2% target.

Bernanke defended the Federal Open Market Committee’s decision
to extend until at least late 2014 the period of “exceptionally low”
short-term interest rates and went further in a post-FOMC press
conference to assert that the Fed is prepared to do more asset purchases
to hold down long-term rates if the pace of economic growth and job
gains is deemed unsatisfactory and inflation remains low.

Bernanke said that, unlike the European Central Bank and other
central banks with an inflation target, the Fed will give equal weight
to the two aspects of its statutory dual mandate — price stability and
maximum employment.

But the Fed chief didn’t rule out further stimulus measures in a
situation where inflation was running above target, but unemployment was
still too high, suggesting the Fed could afford to take its time
bringing inflation back to target if unemployment was running well above
what the Fed regards as its “longer run” level of 5.2% to 6.0%.

He took questions from reporters after FOMC participants’ federal
funds rate projections were released for the first time. Eleven of 17
Fed governors and presidents projected the rate hikes coming in
2014 at the earliest. Four expect no rate hike until 2015, and two
expect rate hikes to be delayed until 2016.By the end of 2014, 11 expect
the funds rate to be 1% or lower with six anticipating that the rate
will remain near zero.

Bernanke emphasized the funds rate forecasts are “conditional” on
evolving economic conditions and subject to change. And, in response to
MNI, he said it was still important for the 10 actual FOMC voters to
continue to provide “forward guidance” on the likely path of the funds
rate.

In its policy statement, the FOMC said it “decided today to keep
the target range for the federal funds rate at 0 to 1/4 percent and
currently anticipates that economic conditions — including low rates of
resource utilization and a subdued outlook for inflation over the medium
run — are likely to warrant exceptionally low levels for the federal
funds rate at least through late 2014.”

The committee had previously said it expected to keep the funds
rate that low ’til at least mid-2013.

In case that wasn’t clear enough, the FOMC said it “expects to
maintain a highly accommodative stance for monetary policy.”

That “highly accommodative stance” could include not just the
prolongation of zero rates but also further expansion of the balance
sheet, Bernanke made clear.

At a minimum, he said, shrinkage of the balance sheet is apt to be
delayed along with the timing of funds rate hikes.

“One implication of our extension of our expected point of
takeoff to late 2014, is to imply that the initial sales from our
balance sheets, which again are far down the road, … will be later
than previously thought,” he said. “That will be presumably in 2015. And
so we do expect to hold our balance sheet at a high level for a longer
period.

Bernanke said “additional purchases remains a topic that we are
still debating and it will depend both on our assessment of the efficacy
and risks of that particular tool.”

But repeatedly, he indicated an openness to doing more quantitative
easing.

In an opening statement, Bernanke said, “the committee recognizes
that hardships imposed by high and persistent unemployment and under
performing economy, and it is prepared to provide further monetary
accommodation if employment is not making sufficient progress towards
assessment of maximum level or inflation shows signs of moving below the
mandated consistent rate.”

And he was more explicit about expanding the Fed’s $2.9 trillion
balance sheet in response to questions.

“We continue to review … our portfolio holdings, securities, and
we are prepared to take further steps in that direction if we see that
the recovery is faltering or inflation is not moving towards target,” he
said when asked about the prospects for more quantitative easing. “So,
that’s … an option on the table.”

“I think it would be premature to say definitively one way or the
other but we continue to look at that option and if conditions warrant
we will certainly consider using it,” he added.

Bernanke acknowledged the Fed has “been very accommodative in the
last couple of years” and said the Fed has not been “passive” in the
face of a subpar recovery. He cited the three years of keeping the funds
rate near zero, two rounds of quantitative easing, the maturity
extension program and the announced plan to delay rate hikes until at
least late 2014.

He emphasized that the FOMC is “not going to mechanically take the
interest rate projections that participants provide and just build
policy off of that. … It’s still going to be necessary for the
Committee to exercise collective judgment and to consider cost and risks
of additional policy actions and to discussion the uncertainty about the
forecast and other factors that come into the policy decision.”

But Bernanke said “if inflation is going to remain below target for
extended period and unemployment progress is very slow, then I
think … there is a case for additional policy action.”

He added that, “We want to continue to observe the situation, but
we’re prepared to look for different ways to provide support for the
economy if in fact we have this unsatisfactory situation.”

“Expanding the balance sheet certainly remains an option — one
that we would consider very seriously if, in particular, progress
towards full employment … became more inadequate or if inflation
remained exceptionally low,” he told another reporter. “So we’ll
continue to look at that … . We’re prepared to take additional
measures in general and that (asset purchases) would be certainly one
class of measures we would want to consider.”

Bernanke was willing to consider easing despite what he conceded
were “good data recently,” given the “uncertainty about where the
economy is going … .

“We want to continue to observe how the economy’s developing,” he
said. “But I would say … if recovery continues to be modest and
progress on unemployment very slow, and if inflation appears to be
likely to be below target for a number of years out … then I think
there would be a very strong case based on our framework for finding
additional tools for expansionary policies to support the economy.”

“So we’ll continue to look at the different options and try to
decide what might be most effective,” he said.

Bernanke said the Fed is “in a difficult situation in terms of
effectiveness of policy tools,” saying that problems in the housing
market” have impeded the “monetary transmission mechanism.”

In an addendum to its regular policy statement, the FOMC enunciated
its “longer-run goals and policy strategy,” in which it said it is
“firmly committed” to fulfilling both its maximum employment and price
stability mandates. In that statement, the FOMC for the first time
enunciated an explicit numerical inflation goal, which Bernanke referred
to as a “target,” of 2% as measured by the price index for personal
consumption expenditures (PCE).

Bernanke said “maximum employment stands on equal footing with
price stability as an objective monetary policy,” but he hedged a bit in
talking about the timing of meeting those two objectives, leaving open
the possibility of running a very stimulative monetary policy in spite
of above-target inflation.

Asked whether he was willing to tolerate inflation higher than the
2% target, Bernanke replied, “We treat them symmetrically,” but “we
cannot control, of course, where inflation and unemployment are at each
moment in time.”

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

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