–Retransmitting Updated Story Published Saturday

By Steven K. Beckner

JEKYLL ISLAND, Ga. (MNI) – Federal Reserve Chairman Ben Bernanke
Saturday continued to defend the Fed’s resumption of quantitative
easing, saying economic and financial data show the need for the Fed “to
do more.”

Bernanke sought to quiet concerns about the new round of
quantitative easing or “QE2″ approved three days earlier by the Fed’s
policymaking Federal Open Market Committee, saying it’s “just monetary
policy” by other means and vowing to manage the Fed’s balance sheet in
such a way as to ensure that inflation does not flare up excessively.

The Fed ran out of room to cut short-term interest rates nearly two
years ago. So the Fed has resumed buying bonds with newly created money
to push down long-term rates. It plans to buy $600 billion in longer
term Treasury securities by mid-2011 on top of $1.7 trillion previously
bought.

Bernanke said he and his fellow monetary policymakers had to resume
so-called quantitative easing to fulfill its statutory “dual mandate,”
which calls for maximum sustainable employment and price stability. He
said the Fed couldn’t be happy with high unemployment and a rate of
inflation that is running below the Fed’s long-term forecast of 1.7% to
2%.

But Bernanke, who was on a panel with former Fed Chairman Alan
Greenspan and former New York Fed President Gerald Corrigan, said the
Fed is just using different tools to accomplish the same results it
would be seeking if it still had room to cut the federal funds rate.

“There’s a sense out there that quantitative easing or asset
purchases is something completely foreign and new and that we have no
idea what’s going to happen,” he said. “Quite to the contrary … . This
is just monetary policy.”

He said the Fed is simply swapping one type of liability for
another type of liability in buying Treasuries.

The aim, he said, is to “reduce long-term interest rates” and
“raise asset prices” and said the program “will work in much the same
way that conventional monetary policy works.”

“There’s not as much discontinuity as people think,” he continued,
although he conceded the way in which the Fed is seeking to create
easier financial conditons is “somewhat different.”

Bernanke said the FOMC acted earlier this week because “we see
inflation below target or the approved range and we see an economy that
has a very high level of underutilization of resources and a low growth
rate.”

“That suggests we should be using monetary policy” to spur growth,
he said, adding that the Fed is using “a different set of tools to
achieve the same results.”

After Corrigan expressed “uneasiness” that the Fed may be unable to
cap inflation once it begins pushing it up, Bernanke said he was
“sensitive to what you’re saying” and stressed “we are very committed on
the FOMC to our price stability objective.”

“I have rejected any notion that we are going to try to raise
inflation to a super-normal level,” he went on, adding that it is
“critical” to the Fed’s “credibility” that low inflation be maintained
in the long run.

However, he observed that “we have had according to many measures
significant disinflation since the peak of the business cycle in 2007.”

He said that disinflation is “at least indicative of a world where
monetary policy is insufficiently stimulative.”

“We can all debate how much monetary policy can do for the real
economy,” he said, but with inflation “continuing to decline … we
should not be satisfied with a situation where we have both a large
amount of slack and declining inflation.”

That was “a signal that more should be done,” he said. “That was
the motivation for the action taken earlier this week.”

The FOMC is not trying to generate inflation so much as it is
“trying to provide some additional stimulus” and to “avoid additional
disinflation,” he said, adding, “we’re equally committed to both sides
of our mandate.”

Bernanke disputed a contention that the late Nobel Prize winning
economist Milton Friedman would disapprove of what the Fed is doing. “I
think we’re doing everything Milton Friedman would have us do,” he said,
adding that Friedman believed “the Fed is responsible for the stability
of nominal aggregates including prices.”

“That means particularly with respect to inflation that we don’t
want inflation to be too high but also we don’t want it to be too low,”
he said. Given the recent data, the FOMC judged that “the downside risks
were greater than the uspide risks.”

“Our objective has been to keep inflation neither too high nor too
low,” he went on. “If you look at what’s happened to key nominal
aggregates, like nominal GDP growth or the monetary aggregates, they’re
all saying we need to do more … because the nominal GDP has been
growing very, very slowly the last two or three yeawrs. The monetary
aggregates have been growing very, very slowly.”

“We need to do more,” he repeated.

Bernanke said “the issue in the long-term for the central bank is
inflation, but we are committed to both parts of our mandate.”

“We are confident we have the tools to manage our balance sheet in
a way that will allow us to achieve price stability in the longer term,”
he said, “but what we are trying to do now is entirely consistent with
monetary theory and practice.”

The Fed is striving for “stability of inflation and stability of
monetary policy within an extraordinary context … considering both the
long run and the short run.”

** Market News International **

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