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Bernanke Signals That the Fed Might Take Action

In a long speech this morning in Boston, Federal Reserve Chairman Ben Bernanke implied that the central bank will take additional action to help the economy, in the face of sustained high unemployment rates, below-target inflation and sluggish growth.

As always with the Fed, the statement came in cagey, somewhat confusing language. But here it is:

Given the Committee’s objectives, there would appear — all else being equal — to be a case for further action. However, as I indicated earlier, one of the implications of a low-inflation environment is that policy is more likely to be constrained by the fact that nominal interest rates cannot be reduced below zero. Indeed, the Federal Reserve reduced its target for the federal funds rate to a range of 0 to 25 basis points almost two years ago, in December 2008. Further policy accommodation is certainly possible even with the overnight interest rate at zero, but nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.

For example, a means of providing additional monetary stimulus, if warranted, would be to expand the Federal Reserve’s holdings of longer-term securities. Empirical evidence suggests that our previous program of securities purchases was successful in bringing down longer-term interest rates and thereby supporting the economic recovery. A similar program conducted by the Bank of England also appears to have had benefits.

In English: The Federal Reserve is concerned about the inflation, unemployment and growth problems. But it cannot lower interest rates — its preferred tool for stoking a bit of inflation and growth in the economy — because rates are already near zero. Therefore, it needs to perform “quantitative easing,” essentially buying up long-term debt from big firms, thereby flushing cash into the economy.

The rest of the speech makes the case for more action clearly and strongly. “[O]verall economic growth has been proceeding at a pace that is less vigorous than we would like,” he said. “In particular, consumer spending has been inhibited by the painfully slow recovery in the labor market, which has restrained growth in wage income and has raised uncertainty about job security and employment prospects. Since June, private-sector employers have added, on net, an average of only about 85,000 workers per month — not enough to bring the unemployment rate down significantly.”

He continued: “Although output growth should be somewhat stronger in 2011 than it has been recently, growth next year seems unlikely to be much above its longer-term trend. If so, then net job creation may not exceed by much the increase in the size of the labor force, implying that the unemployment rate will decline only slowly. That prospect is of central concern to economic policymakers, because high rates of unemployment — especially longer-term unemployment — impose a very heavy burden on the unemployed and their families. More broadly, prolonged high unemployment would pose a risk to consumer spending and hence to the sustainability of the recovery.”

He also noted worrying inflation trends (inflation actually is too low, which isn’t good for the economy either) and growth trends.

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