Bernanke Wields New Tools

Fed moves into uncharted territory by tying its rate outlook to unemployment and inflation.

Chairman Ben S. Bernanke moved the Federal Reserve further into uncharted policy territory in combating joblessness by tying the bank’s interest-rate outlook to unemployment and inflation, while committing to an even faster expansion of the central bank’s balance sheet.

The actions on the eve of the Fed’s centenary year underscore Bernanke’s hallmark commitment to experimentation and forceful action, derived in part from his research showing too little monetary stimulus produced large economic costs for the U.S. in the 1930s and for Japan in the 1990s. He called the current state of the labor market, with unemployment at 7.7 percent, “an enormous waste of human and economic potential” and said the benefits of more bond buying outweigh the potential risks.

‘All in’

“The Fed is all in,” said Diane Swonk, chief economist for Mesirow Financial Holdings Inc. in Chicago. “They are absolutely committed to averting the mistakes of the Japanese and of the Great Depression. They will not stop too soon. He is willing to take the risk of unintended consequences.”

Balance Sheet

The Fed has more than tripled the size of its balance sheet with three rounds of large-scale asset purchases intended to bring down long-term borrowing costs and stimulate purchases of homes and cars. Bernanke broke new ground with the latest round of so-called quantitative easing by setting no limit on the size or duration of the program.

Price Acceleration

“There’s reason to be concerned” about inflation, said Marvin Goodfriend, a former adviser at the Richmond Fed. The Fed’s 6.5 percent unemployment objective is “aggressive,” while using a projection for price acceleration over one to two years may not lead to policy tightening before inflation “becomes a problem,” he said.

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