Federal Reserve Chairman Ben Bernanke said on Wednesday the central bank is ready to ease monetary policy further if the economy weakens and inflation moves lowerl. Hit the jump to read the rest of the story.
Funk Flex
While holding to a view that recent economic softness would eventually pass, he appeared less confident in that projection — and more willing to entertain the possibility of another round of stimulus.
“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support,” Bernanke told the House of Representatives Financial Services Committee.
Bernanke specifically noted Fed forecasts for June, which were already revised down significantly from April, had not incorporated recent data, particularly last Friday’s dismal employment report. It showed job growth essentially ground to a halt in May and June, while jobless rate rose to 9.2 percent.
U.S. stocks, which have taken a drubbing over the last week on worries about Europe’s debt troubles and on concerns about the U.S. economic outlook, rallied 1.2 percent, while Treasury bond prices and the dollar tumbled.
“The Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate,” Bernanke said.
Pressed on the budget during the question-and-answer session, Bernanke reiterated his warning that a failure to raise the U.S. debt ceiling would deal a severe blow to the global economic recovery.
Minutes from the Fed’s June meeting, released on Tuesday, showed some policymakers believe the Fed should stand ready to provide more support to the economy if the recovery flags, rekindling the threat of a debilitating downward spiral in prices and wages.
Others on the policy-setting Federal Open Market Committee, however, felt inflation risks might force the central bank to withdraw stimulus sooner than is currently anticipated.
DOOR OPEN TO QE3
Still, given the change in tune, some investors were betting the more dovish members of the committee would win the day in pushing for a third round of quantitative easing if the economy continues to deteriorate.
“My initial reaction was ‘QE3 here we come’,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “We suspected the Fed would come up with some sort of QE3 in light of the disturbance surrounding the sovereign debt markets.”
Bernanke did not go into great detail regarding Europe, but the Fed chief’s outlook on U.S. growth prospects was understandably cautious.
