By Steven K. Beckner
(MNI) – Although the Federal Reserve’s policymaking Federal Open
Market Committee decided not to inject additional monetary stimulus
into the economy at this time, Fed Chairman Ben Bernanke made very clear
that he is prepared to ease further if the growth and jobs picture
remains unsatisfactory and/or if disinflation becomes excessive.
And Bernanke, in a post-FOMC press conference, said that one option
would be to do large-scale purchases of mortgage backed securities.
The Fed chief also held open the possibility of a revamped
communications strategy that would provide clearer, more data dependent
“forward guidance” on how long the Fed will keep the federal funds rate
near zero.
In explaining its decision not to ease further just yet, the FOMC
in its policy statement noted that “economic growth strengthened
somewhat in the third quarter” and it noted that consumer spending has
been growing “at a somewhat faster pace.”
However, the statement also cited “significant downside risks,” and
the FOMC’s revised three-year economic projections were downgraded
sharply from those made in June.
Given those downgrades from earlier expectations and the uncertain
outlook, Bernanke left no doubt that he thinks the Fed may have to do
more. At the same time, though, he did not prejudge what more might be
needed beyond what the Fed has already done.
Defending the FOMC’s decision to pause, he said, “We have taken a
lot of actions. “Let me be very clear that the Federal Reserve’s
monetary policy a highly accommodated now,” he said.
“We have done $2 trillion of asset purchases and commitments about
rates and we have extended the maturity of our portfolio,” he noted,
adding that the Fed is “being aggressive” in providing monetary
stimulus.
But asked about the conditions for further accommodation, Bernanke
said, “We are prepared to do that.”
He said the FOMC will have to “observe how the economy evolves”
relative to its projections. He said it will be “very important to see
what actually happens in terms of financial market conditions and
economic growth.”
“We are prepared to take further action,” Bernanke reiterated,
“We’ve already taken quite a bit of action but we are prepared to do
more and we have the tools to do more if that’s appropriate.”
While the Fed will “do what it can to meet its mandate,” Bernanke
suggested it’s not all up to the Fed to speed recovery, observing there
is “obviously a broad range of policies can affect growth and employment
and I hope that there will be a range of actions that will complement
and supplement the Federal Reserve’s efforts.”
At another stage of the press conference, Bernanke said, “We need
to do whatever we can to move the economy towards price stability and
maximum employment.” And he added, “We will continue to do that so long
as the tools we have are efficacious and don’t have costs or risks or
negative side effects that are worse than the benefits.”
Calling the FOMC forecast “very unsatisfactory” in terms of
anticipated growth and unemployment reduction, he said the FOMC will
have to make a judgment whether the Fed’s tools are “likely to be
sufficiently effective or do they bear costs and risks that would make
them less effective or not worth using.”
Bernanke said the Fed’s chief remaining tools are asset purchases
and communication, which he said the FOMC can use “in combination” to
achieve its dual mandate of maximum employment and price stability.
Regarding the first, Bernanke said “MBS purchases and Treasury
security purchases are one set of tools that we have.”
He said the FOMC “will have to look at the outlook, and if it
judges that we are falling sufficiently short of our objectives —
inflation falling at or below target and growth being insufficient —
and we believe that monetary stimulus would be beneficial, then the
committee would obviously try to take corrective action. But I can’t —
it is a committee decision. We will have to look at the outlook but
remain prepared to take action as appropriate to make sure that the
recovery continues and we have stable prices in the U.S.”
Asked about buying mortgage-backed securities in some future
quantitative easing program, Bernanke called MBS purchases “a viable
option.”
Buying MBS is “certainly something we would consider,” he said, “if
conditions were appropriate. So the answer is yes, we would certainly
look at that.”
Regarding communications, Bernanke indicated that the FOMC is
actively considering ways to improve on its “forward guidance,” which as
of now is limited to saying that The FOMC ” 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 mid-2013.”
The FOMC would like to improve on that language, he suggested,
although he said it is not now contemplating “any radical change.”
The current language is inadequate, he implied, saying that the
time of Fed tightening “could well be at some point beyond” mid-2013.
Emphasizing that no final decisions have been made about
communications strategy, Bernanke said, “Clearly there is a range of
things that we can do.”
“We can provide more information about our objectives,” he said.
“For example, we could provide information about where we want inflation
to be in the long term and provide information about the future path of
interest rates which we have done to some extent via our 2013 language
in the statement and alternative approach which (Chicago Fed President)
Charlie Evans and others have suggested, which is to tie that to
economic conditions and to provide more information about under what
circumstances we would raise rates.”
“That is certainly something we have discussed and I think it is an
interesting alternative,” he continued.
Bernanke also said “there is a lot of interest in using the survey
of economic projections in more constructive ways than we have up until
now to provide information to the public about our plans and in
particular using the SEP as a way of giving information about our future
policy decisions is something that’s on the table. ”
“There is no decision made about that,” he said. ” But that’s one
direction that we might find productive.”
Evans, incidentally, turned up as a surprise lone dissenter,
wanting more accommodation than the Committee voted for.
** Market News International **
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