Fed can prevent recession: Bernanke

WASHINGTON - Federal Reserve Chairman Ben Bernanke said the central bank has the tools to prevent the US economy from slipping back into a recession, while stopping short of indicating an immediate need for more stimulus.

Bernanke presented a scenario for continued expansion as households rebuild their savings, banks increase lending and companies become more willing to hire. Stocks jumped and Treasuries fell as he said, "the preconditions for a pickup in growth in 2011 appear to remain in place" and rebuffed skeptics who argue the Fed is out of ammunition.

"The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do," Bernanke said in a speech on Aug 27 to central bankers and economists at the Fed's annual conference in Jackson Hole, Wyoming, detailing choices that include renewed large-scale securities purchases.

"Bernanke expressed a willingness to provide further monetary accommodation, if necessary, but did not signal that any such decision was a done deal," said Michael Feroli, chief US economist at JPMorgan Chase & Co. "The September meeting may be too soon to expect a major policy action, though we would not rule that out if the data continues to disappoint."

The Standard & Poor's 500 Index gained 1.7 percent to 1064.59, the biggest increase since Aug 2. The yield on the 10- year note, which moves inversely to price, had the largest gain since June 2009, increasing 17 basis points, or 0.17 percentage point, to 2.64 percent.

Growth estimate

The Fed chairman's remarks followed a drumbeat of negative economic reports, including a reduced estimate of second-quarter growth released last Friday, that have prompted economists including Harvard University's Martin Feldstein to warn that the risks of a renewed recession are rising.

"There's still a significant risk, maybe one chance in three, that there will be a double dip, real GDP falling, before we're in the clear," Feldstein, a member of the committee at the National Bureau of Economic Research that dates the beginning and end of recessions, said in an interview.

The Commerce Department lowered its estimate for gross domestic product (GDP) in the second quarter to an annual pace of 1.6 percent from an initially reported 2.4 percent. Intel Corp, the world's biggest chipmaker, yesterday cut its forecasts for third-quarter revenue and gross profit margin, adding to signs that capital spending is cooling in the US.

Rates near zero

Economists including Nouriel Roubini of New York University, who predicted the financial crisis, argue there's little more the Fed can do to boost the economy after cutting interest rates almost to zero in December 2008 and flooding the financial system with cash through purchases of more than $1.7 trillion of Treasuries and housing debt.

"We are running out of policy bullets," Roubini said in an interview last Friday on Bloomberg Radio.

Bernanke disputed that view, saying, "Should further action prove necessary, policy options are available." He provided his most detailed analysis yet of three tools: further purchases of securities, a change in the Fed's policy statement and a reduction of the interest rate it pays on banks' excess reserves.

The Federal Open Market Committee (FOMC) "has not agreed on specific criteria or triggers for further action, but I can make two general observations," Bernanke said. "First, the FOMC will strongly resist deviations from price stability in the downward direction."

"Second, regardless of the risks of deflation, the FOMC will do all that it can to ensure continuation of the economic recovery," he added.

The speech increases the focus on coming data, especially the government's August employment report, scheduled for release on Sept 3. A weak reading could convince some FOMC members who have resisted additional steps that further action is needed, said Roberto Perli, a former Fed Board economist.

"Bernanke's speech was employment-centric," said Perli, a managing director at International Strategy & Investment Group in Washington. "That could be a very important indicator to watch, more than the inflation data."

Bernanke, a former Princeton University economist who began a second four-year term in February, said growth during the past year has been "too slow" and unemployment too high. Even so, he said a handoff from fiscal stimulus and inventory re-stocking to consumer spending and business investment "appears to be under way."

Bloomberg News

(China Daily 08/30/2010 page14)