Federal Reserve Chairman Ben S. Bernanke tempered expectationsthe Fed will resume buying bonds as criticism from Republicansenators highlighted the potential backlash to additional monetarystimulus.

“We're not proposing anything today,” Bernanke said to theSenate Banking Committee yesterday in Washington. “We just want tomake sure that we have the options when they become necessary. Butat this point, we're not proposing to undertake that option,” hesaid, referring to a third round of quantitative easing, orQE3.

Bernanke appeared for semi-annual congressional testimony theweek after the government reported that the jobless rate rose to9.2 percent last month, with 14.1 million Americans unemployed. TheFed has held its target interest rate near zero for more than 30months and expanded its balance sheet to a record $2.88 trillionthrough two rounds of large-scale asset purchases. Policy makersnow are waiting to see whether the economy strengthens beforechanging their stance, Bernanke said.

Tim Johnson, a Democrat from South Dakota and the committeechairman, asked Bernanke why he isn't starting a new round ofpurchases to revive growth and reduce unemployment. SenateRepublicans such as Richard Shelby of Alabama, Bob Corker ofTennessee and Pat Toomey of Pennsylvania opposed any considerationof increasing the Fed's record stimulus.

U.S. stocks declined yesterday to the lowest level of the month,with the Standard & Poor's 500 falling 0.7 percent to 1,308.87in New York. In House testimony on July 13, Bernanke said the Fedstill has tools for stimulus, and that “we have to keep all theoptions on the table,” driving share prices higher.

Not Everyone
“It's not the whole Congressthat says QE3 is a bad idea, but definitely they have to take thoseopinions into account,” said Roberto Perli, a former Fed economistwho is now a managing director at International Strategy &Investment Group in Washington.

“In addition to the external politics from Congress, he hasinternal dynamics to worry about,” he said. “Discussion of QE3 willbe strongly opposed by even more FOMC members because it wouldstart from an even larger balance sheet.”

Dallas Fed President Richard Fisher told reporters on July 13that “we've exhausted our ammunition, in my view,” and “I do notpersonally see the benefit of more monetary accommodation even ifthe economy weakens further.”

Shelby, the committee's senior Republican, said “it appears thatthe Fed may be going in the wrong direction.”

Shelby criticized the Fed in November when it launched a $600billon bond-buying program to rejuvenate the economy, saying thepurchases, which ended last month, could trigger an inflationsurge. Shelby also said bond purchases by the Fed could fuelasset-price bubbles on Wall Street.

Fed 'Activism'
“I find the activism at theFed right now a major turnoff, and I am very concerned,” Corkersaid to Bernanke during the hearing yesterday.

Should the economy turn out to be weaker than expected, thecentral bank may provide more monetary stimulus, Bernanke said.More quantitative easing is an option if a recent economic slowdownpersists and deflationary forces re-emerge, he said.

As in his July 13 testimony, Bernanke told lawmakers yesterdaythat the Fed must be flexible and prepared to shift in eitherpolicy direction. The Fed may tighten credit if inflation were torise more than anticipated, he said to the House Financial ServicesCommittee.

“There wasn't any inconsistency in his remarks” this week, saidJim O'Sullivan, global chief economist at MF Global Inc. Bernankemerely emphasized yesterday “the fact that they aren't planning QE3right now,” he said.

Second Round
Bernanke said the Fed nowfaces conditions that are different than they were in August, whenhe signaled a second round of large-scale asset purchases. Then,the economy was in danger of stalling, he said, and the Fed wasconcerned the country may experience deflation, a broad andprolonged drop in prices, wages and the value of assets such ashomes and stocks.

“Today the situation is more complex,” Bernanke told lawmakers.“Inflation is higher. Inflation expectations are close to ourtarget,” he said.

Breakeven inflation rates calculated from yield differences on10-year Treasury notes and inflation-indexed U.S. government bondsof similar maturity stood at 2.26 percent yesterday. That's up from1.62 percent when Bernanke signaled the possibility of a secondround of bond purchases at his Aug. 27 speech last year in JacksonHole, Wyoming.

Waiting for Pickup
“We are uncertain aboutthe near-term developments in the economy,” he said. “We'd like tosee if, in fact, the economy does pick up, as we areprojecting.”

Bernanke predicted economic growth will pick up in the secondhalf of this year at a pace above 3 percent. He estimated theeconomy expanded at a 2 percent rate during the first six months ofthis year, less than necessary to reduce the unemployment rate.

The Fed chief “put a very high bar on doing more QE when he saidhe has to see the reemergence of deflation risks,” Perli said.“Clearly we are nowhere near that point at this time. To me, that'sthe clearest signal that they're not thinking about it seriously atthis stage.”

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