Federal Reserve Chairman Ben S. Bernanke said he would not rule out further bond purchases to boost growth and reduce unemployment, which he called a “grave concern.”
“The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant,” Bernanke said today in a speech to central bankers and economists at an annual forum in Jackson Hole, Wyoming.
Bernanke’s speech comes two weeks before he leads a meeting of the Federal Open Market Committee to decide whether an expansion of the Fed’s record stimulus is needed to spur growth. Two rounds of large-scale asset purchases totaling $2.3 trillion have so far failed to reduce the jobless rate below 8 percent more than three years into the recovery.
Bernanke’s 24-page speech at the Kansas City Fed’s symposium reviewed the Fed’s policy actions through the financial crisis and use of nontraditional policy tools such as communication and outright bond purchases, concluding that they have been effective in boosting growth and improving financial conditions. He said that declines in the unemployment rate would continue only if growth picks up above its longer term trend.
“We have seen no net improvement in the unemployment rate since January,” Bernanke told central bankers and economists in the audience, according to a text of his remarks released in Washington. “Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time.”
The Fed chairman said long periods of high unemployment produce “enormous suffering and waste of human talent” and also risk causing “structural damage on our economy that could last for many years.”
Policy makers at their Aug. 1 meeting were moving toward additional action, according to minutes released last week. Many members of the panel said more stimulus will be needed “fairly soon” unless the recovery shows signs of a “substantial and sustainable strengthening.”
The Fed chairman echoed those remarks, concluding his speech by saying “the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Since the August meeting, data on housing, manufacturing and retail sales have exceeded expectations.
Retail sales rose 0.8 percent in July, the most in five months, and sales of existing homes rose from an eight-month low. Consumers increased spending for the first time in three months, government data showed yesterday, and retailers such as Gap Inc. and Macy’s Inc. posted same-store sales this month that topped analysts’ estimates.
The Standard & Poor’s 500 Index has climbed 11 percent this year as company earnings beat forecasts and investors speculated that the Fed will take steps to support the expansion. About 71 percent of companies in the index reported results that exceeded analysts’ estimates, according to data compiled by Bloomberg.
The yield on the benchmark 10-year Treasury note fell to 1.62 percent yesterday from a 2012 high of 2.38 percent in March as investors sought the safety of U.S. debt.
Recent signs of strength in the economy may not be enough to satisfy Fed policy makers whose mandate from Congress bids them to aim for maximum employment and stable prices.
Gross domestic product expanded at a 1.7 percent annual rate in the second quarter, slowing from 4.1 percent in the final three months of last year. Employers probably added 127,000 jobs in August, down from 163,000 a month before, according to the median forecast in a Bloomberg News survey of economists.
At the same time, inflation is falling below the Fed’s goal of 2 percent. The measure watched by central bankers, known as the personal consumption expenditures price index, slowed to a 1.3 percent annual increase in July, the least since October 2009.
Cooling growth leaves the world’s biggest economy more vulnerable to what Bernanke has called “two main sources of risk” -- the debt crisis in Europe and the so-called fiscal cliff in the U.S., the $600 billion of tax increases and spending cuts that will take effect automatically at the end of the year unless Congress acts.
The minutes of their last meeting showed policy makers considered extending the time horizon the Fed expects to keep its benchmark interest rate low.
Since January, the Fed has said economic conditions would likely warrant keeping the rate “exceptionally low” through at least late 2014. The rate has been kept close to zero since December 2008.
Policy makers could also opt for a third round of large- scale asset purchases, known as quantitative easing, intended to push long-term borrowing costs lower.
The steps are among the unorthodox policy tools wielded by Bernanke, a 58-year-old former Princeton professor, as he sought to pull the nation out of its worst recession since the Great Depression and then to ensure a lasting recovery.
Bernanke, a student of the Depression, has presided over what the economist William White, a former member of the Bank for International Settlement’s executive committee, calls “one of the greatest economic experiments of all time.”
Three years into the expansion, Bernanke has tried to nudge the economy onto a path of stronger growth to boost hiring. The FOMC on June 20 extended a program, known as Operation Twist, that replaces short-term notes in its portfolio with longer-term assets in an effort to further suppress longer-term interest rates.
The Fed chairman’s unprecedented use of the central bank’s powers -- which also involved the rescue of Bear Stearns Cos. and American International Group Inc. during the financial crisis -- has become a contentious issue in an election year.
Mitt Romney, the Republican presidential candidate, told the Fox Business Network on Aug. 23 that he wouldn’t reappoint Bernanke, raising questions about the succession more than a year before Bernanke’s term expires in January 2014. The 2012 Republican platform calls for an audit of the Fed’s monetary policy.
“Criticism is fair game, but this is like political football,” said Mark Gertler, a New York University economist and research collaborator with Bernanke. “Years from now, people who will look back are going to thank God we had Bernanke as chairman over this period and that he was able to keep the focus on the job and conduct responsible monetary policy.”
Bernanke’s speech at Jackson Hole in 2010 signaled a willingness to undertake additional unconventional policies to ward off weak growth and the risk of deflation.
At its meeting the following November, the Fed announced it would embark on a second round of bond purchases. The Standard & Poor’s 500 Index rallied 18 percent beginning Aug. 27, 2010, when Bernanke spoke, through the year end.
While Eric Rosengren, president of the Federal Reserve Bank of Boston, and Charles Evans, head of the Chicago Fed, have called for additional stimulus since the last FOMC meeting, St. Louis Fed President James Bullard said in a Bloomberg Television interview today that he “would like to see some more data before taking really big action.”