Federal Reserve Chairman Ben S. Bernanke saidhe would not rule out further bond purchases to boost growth andreduce unemployment, which he called a “grave concern.”

“The costs of nontraditional policies, when consideredcarefully, appear manageable, implying that we should not rule outthe further use of such policies if economic conditions warrant,”Bernanke said today in a speech to central bankers and economists at an annual forum inJackson Hole, Wyoming.

Bernanke's speech comes two weeks before he leads a meeting ofthe Federal Open Market Committee to decide whether an expansion ofthe Fed's record stimulus is needed to spur growth. Two rounds oflarge-scale asset purchases totaling $2.3 trillion have so farfailed to reduce the jobless rate below 8 percent more than threeyears into the recovery.

Bernanke's 24-page speech at the Kansas City Fed's symposiumreviewed the Fed's policy actions through the financial crisis anduse of nontraditional policy tools such as communication andoutright bond purchases, concluding that they have been effectivein boosting growth and improving financial conditions. He said thatdeclines in the unemployment rate would continue only if growthpicks up above its longer term trend.

“We have seen no net improvement in the unemployment rate sinceJanuary,” Bernanke told central bankers and economists in theaudience, according to a text of his remarks released inWashington. “Unless the economy begins to grow more quickly than ithas recently, the unemployment rate is likely to remain far abovelevels 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 riskcausing “structural damage on our economy that could last for manyyears.”

Policy makers at their Aug. 1 meeting were moving towardadditional action, according to minutes released last week. Manymembers of the panel said more stimulus will be needed “fairlysoon” unless the recovery shows signs of a “substantial andsustainable strengthening.”

The Fed chairman echoed those remarks, concluding his speech bysaying “the Federal Reserve will provide additional policyaccommodation as needed to promote a stronger economic recovery andsustained improvement in labor market conditions in a context ofprice stability.”

Housing, Factories

Since the August meeting, data on housing, manufacturing andretail 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. Consumersincreased spending for the first time in three months, governmentdata showed yesterday, and retailers such as Gap Inc. and Macy'sInc. posted same-store sales this month that topped analysts'estimates.

The Standard & Poor's 500 Index has climbed 11 percent thisyear as company earnings beat forecasts and investors speculatedthat the Fed will take steps to support the expansion. About 71percent of companies in the index reported results that exceededanalysts' estimates, according to data compiled by Bloomberg.

The yield on the benchmark 10-year Treasury note fell to 1.62percent yesterday from a 2012 high of 2.38 percent in March asinvestors sought the safety of U.S. debt.

Recent signs of strength in the economy may not be enough tosatisfy Fed policy makers whose mandate from Congress bids them toaim for maximum employment and stable prices.

Gross domestic product expanded at a 1.7 percent annual rate inthe second quarter, slowing from 4.1 percent in the final threemonths of last year. Employers probably added 127,000 jobs inAugust, down from 163,000 a month before, according to the medianforecast in a Bloomberg News survey of economists.

At the same time, inflation is falling below the Fed's goal of 2percent. The measure watched by central bankers, known as thepersonal consumption expenditures price index, slowed to a 1.3percent annual increase in July, the least since October 2009.

Cooling growth leaves the world's biggest economy morevulnerable to what Bernanke has called “two main sources of risk” —the debt crisis in Europe and the so-called fiscal cliff in theU.S., the $600 billion of tax increases and spending cuts that willtake effect automatically at the end of the year unless Congressacts.

The minutes of their last meeting showed policy makersconsidered extending the time horizon the Fed expects to keep itsbenchmark interest rate low.

Since January, the Fed has said economicconditions would likely warrant keeping the rate “exceptionallylow” through at least late 2014. The rate has been kept close tozero since December 2008.

Policy makers could also opt for a third round of large- scaleasset purchases, known as quantitative easing, intended to pushlong-term borrowing costs lower.

The steps are among the unorthodox policy tools wielded byBernanke, a 58-year-old former Princeton professor, as he sought topull the nation out of its worst recession since the GreatDepression and then to ensure a lasting recovery.

Bernanke, a student of the Depression, has presided over whatthe economist William White, a former member of the Bank forInternational Settlement's executive committee, calls “one of thegreatest economic experiments of all time.”

Three years into the expansion, Bernanke has tried to nudge theeconomy onto a path of stronger growth to boost hiring. The FOMC onJune 20 extended a program, known as Operation Twist, that replacesshort-term notes in its portfolio with longer-term assets in aneffort to further suppress longer-term interest rates.

The Fed chairman's unprecedented use of the central bank'spowers — which also involved the rescue of Bear Stearns Cos. andAmerican International Group Inc. during the financial crisis — hasbecome a contentious issue in an election year.

Mitt Romney, the Republican presidential candidate, told the FoxBusiness Network on Aug. 23 that he wouldn't reappoint Bernanke,raising questions about the succession more than a year beforeBernanke's term expires in January 2014. The 2012 Republicanplatform 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 researchcollaborator with Bernanke. “Years from now, people who will lookback are going to thank God we had Bernanke as chairman over thisperiod and that he was able to keep the focus on the job andconduct responsible monetary policy.”

Bernanke's speech at Jackson Hole in 2010 signaled a willingnessto undertake additional unconventional policies to ward off weakgrowth and the risk of deflation.

At its meeting the following November, the Fed announced itwould 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 ofBoston, and Charles Evans, head of the Chicago Fed, have called foradditional stimulus since the last FOMC meeting, St. Louis FedPresident James Bullard said in a Bloomberg Television interviewtoday that he “would like to see some more data before takingreally big action.”

Bloomberg News

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