By Steven K. Beckner

(MNI) – An expansion of the Federal Reserve’s quantitative easing
program beyond the scheduled $600 billion of Treasury security purchases
is “certainly possible” depending on QE2’s “efficacy” and on how the
economy and inflation evolve, Chairman Ben Bernanke said in an interview
aired Sunday on CBS television’s “60 Minutes” program.

Bernanke, in comments made in an interview conducted Nov. 30 when
he was visiting Ohio State University in Columbus, Ohio, reiterated his
strongly felt concern about the high level of unemployment, saying it
represents the “primary source of risk” for a renewed economic slowdown.

Bernanke downplayed the risk of deflation, but said inflation is so
low that it is “awfully close” to verging on a decline in the price
level. And he said that deflation would be a “more serious concern” in
the absence of QE2.

He also maintained that unemployment would be “much, much higher”
— possibly as much as 25% — in the absence of the Fed’s aggressive
response to the financial crisis and recession.

Critics have warned the Fed’s resumption of quantitative easing or
QE2 as it has been called will lead to higher inflation, dollar
depreciation and new asset bubbles. But Bernanke countered that they are
failing to look at “the risks of not acting.”

Without the Fed’s unconventional monetary stimulus, he maintained,
low inflation could morph into economically damaging deflation and
unemployment could go even higher than it is already.

As it is, he said, “the unemployment rate is just not going down”
and warned it could take four to five years before it is back to “more
normal” levels.

The Fed chief expressed “100%” confidence in the Fed’s ability to
control inflation through interest rate hikes when the time comes, but
he acknowledged the “trick” will be to decide when it is time to tighten
monetary policy.

Bernanke’s remarks were only the latest in a series of public
justifications he has made of the Fed’s new round of quantitative easing
since the policy was announced following a Nov. 3 Federal Open Market
Committee meeting.

The FOMC announced at that time that it would “review the pace of
its securities purchases and the overall size of the asset-purchase
program in light of incoming information and will adjust the program as
needed to best foster maximum employment and price stability.”

Various officials have previously made clear that this leaves the
door open to more asset purchases, and Bernanke spoke in a similar vein
when asked whether the Fed might do more than the scheduled $600
billion.

“Oh, it’s certainly possible,” he said. “And again, it depends on
the efficacy of the program. It depends, on inflation. And finally it
depends on how the economy looks.”

Explaining again why the FOMC approved QE2, Bernanke said the
economy was falling short on both sides of the Fed’s dual mandate of
full employment and price stability. But as he did in his speech at Ohio
State, he seemed to be particularly passionate about the former.

Interviewed before the Labor Department announced a two-tenths
uptick in the unemployment rate to 9.8% in November, Bernanke said, “The
unemployment rate is just not going down.”

“Unemployment is just about the same as it was in mid 2009, when
the economy started growing,” he said. “So, that’s a major concern. And
it looks that at current rates, that it may take some years before the
unemployment rate is back down to more normal levels.”

“Between the peak and the end of last year, we lost eight and a
half million jobs,” Bernanke continued. “We’ve only gotten about a
million of them back so far. And that doesn’t even account (for) the new
people coming into the labor force.”

He added, “at the rate we’re going, it could be four, five years
before we are back to a more normal unemployment rate — somewhere in
the vicinity of say five or six percent.”

Bernanke expressed particular concern about the fact that more than
40% of the unemployed have been unemployed for six months or more.”

“That’s unusually high,” he said. “And people who are unemployed
for such a long time, they — their skills erode. Their attachment to
the labor force diminishes and it may be a very, very long time before
they find themselves back in a normal working position.”

Bernanke doubted the economy will go back into a “double dip”
recession, partially because cyclical sectors like housing “can’t get
much weaker.” However, he warned that “a very high unemployment rate for
a protracted period of time, which makes consumers, households less
confident, more worried about the future, (is) … the primary source of
risk that we might have another slowdown in the economy.”

Asked whether the recovery is self-sustaining, he replied, “It may
not be.”

“It’s very close to the border,” he continued. “It takes about two
and a half percent growth just to keep unemployment stable. And that’s
about what we’re getting. We’re not very far from the level where the
economy is not self-sustaining.”

As for the price stability aspect of the dual mandate, Bernanke
called inflation “very, very low” and said, “we’re getting awfully close
to the range where prices would actually start falling.”

Asked how much of a danger actual deflation is, Bernanke replied,
“I would say, at this point, because the Fed is acting, I would say the
risk is pretty low. But if the Fed did not act, then given how much
inflation has come down since the beginning of the recession, I think it
would be a more serious concern.”

Bernanke called QE2 critics inflation fears “way overstated.”

“We’ve looked at it very, very carefully,” went on. “We’ve analyzed
it every which way.”

“One myth that’s out there is that what we’re doing is printing
money,” Bernanke continued. “We’re not printing money. The amount of
currency in circulation is not changing. The money supply is not
changing in any significant way.”

It appeared a bit odd that Bernanke would say that, though, because
when he appeared on “60 Minutes” on March 15, 2009, after the Fed had
embarked on its first round of quantitative easing, he explicitly
described Fed policy as “printing money … essentially.”

In the more recent interview, Bernanke explained Q.E. in different
terms. “What we’re doing is lowering interest rates by buying Treasury
securities. And by lowering interest rates, we hope to stimulate the
economy to grow faster.”

He said “the trick is to find the appropriate moment when to begin
to unwind this policy. And that’s what we’re going to do.

Asked whether inflation has become less of a priority for the Fed,
Bernanke replied, “No, absolutely not. What we’re trying to do is
achieve a balance. We’ve been very, very clear that we will not allow
inflation to rise above two percent or less.”

Bernanke blithely dismissed concerns that the Fed won’t tighten
credit in time to head off an acceleration of inflation.

“We could raise interest rates in 15 minutes if we have to,” he
said. “So, there really is no problem with raising rates, tightening
monetary policy, slowing the economy, reducing inflation, at the
appropriate time.”

“Now, that time is not now,” he added.

-more- (1 of 2)

** Market News International **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$BR$]