August 11, 2022

Bernanke Says Fed Would Consider New Stimulus

Less than a month has passed since Mr. Bernanke said at a press conference that the central bank intended to stand back and take the measure of the nation’s sluggish recovery. Wednesday’s remarks amounted to acknowledgment that so far, the news has been almost uniformly bad.

“I think we have to keep all the options on the table,” Mr. Bernanke said in testimony before the House Financial Services Committee. “We don’t know where the economy is going to go.”

He described options, including a public commitment to maintain existing aid programs for a longer period, new asset purchases to drive down interest rates, or steps to encourage banks to withdraw money kept on reserve at the Fed and use it to make loans.

Republicans have criticized the Fed for its efforts to stimulate growth, fearing that it would lose control over inflation. But Representative Spencer Bachus, the Alabama Republican who is chairman of the committee, said on Wednesday that he agreed with Mr. Bernanke.

“I’m glad that you are going to maintain some flexibility, which may be needed, because we don’t know what tomorrow will bring,” Mr. Bachus said.

Mr. Bernanke made clear that a resumption of the central bank’s economic revival campaign faced a high hurdle. He said that the Fed would look for two conditions, economic weakness beyond current expectations, and a renewed threat of deflation.

The first seems obvious. The second, however, may be the more important factor. The Fed’s decision to resume asset purchases last summer was made in large part because the central bank feared that prices might begin to decline, a phenomenon that can undermine growth because it causes people to delay purchases, fueling a downward cycle.

Since then, the pace of price increases has rebounded toward levels that economists consider healthy. Indeed, earlier this year, concern shifted to the possibility that prices were rising too fast. While Mr. Bernanke and other Fed officials say they believe those increases will abate, there is little risk of deflation — and therefore little chance of additional efforts.

“In other words, it is a possibility next year if inflation drops back, but not in the short term,” Paul Ashworth, chief United States economist at Capital Economics, wrote in a note to clients.

Members of the Fed’s policy-making committee discussed the issue during their most recent meeting, at the end of June, but are divided regarding the costs and benefits, according to minutes of that meeting, which the Fed released on Tuesday.

The Fed released its most recent economic forecast after that meeting, predicting that the economy would expand at a moderate pace of 2.7 to 2.9 percent this year.

In the intervening weeks, the government has reported that employment increased by only 18,000 jobs in June, and that exports were weaker than expected. That has led a number of private forecasters to slash estimates of second-quarter growth. Mr. Bernanke did not update the Fed’s own projections, but his remarks reflected greater concern.

“Among the headwinds facing the economy are the slow growth of consumer spending, even after accounting for the effects of food and higher energy prices,” Mr. Bernanke said in his prepared testimony. “The ability and willingness of consumers to spend will be an important determinant of the pace of the recovery in coming quarters.”

Later, Mr. Bernanke described the Fed’s economic projection for the rest of this year — growth of about 3.5 percent — and said, “We’ll see if that’s the case.”

Despite the fragile health of the economy, most questions from the members of the committee focused on the political battle over the federal deficit — a long-term problem that, as Mr. Bernanke told the committee, does not pose an immediate danger to the economy, although he warned that the debt ceiling must be raised immediately.

When Mr. Bernanke was asked about the millions of Americans who cannot find jobs, he took the opportunity to gently chide the committee for its focus. “I think I’d like to make very clear that I think we have two crises in the economy,” he said in response. “One of them is the fiscal set of issues that you’re all paying a lot of attention to right now, but I think the job situation is another crisis.”

The Fed is charged by Congress with minimizing unemployment, and some of its critics say that current unemployment rate of 9.2 percent should be a sufficient reason by itself for the central bank to expand its roster of economic aid programs.

Mr. Bernanke noted that the scale of the Fed’s existing efforts was unprecedented. The central bank has kept short-term interest rates near zero for more than two years. It also owns more than $2 trillion in mortgage-backed securities and government debt, the legacy of its two asset-purchase programs to reduce long-term interest rates.

“We are prepared to take further steps if needed,” he said.

Mr. Bernanke’s account of the Fed’s efforts was challenged by Texas Republican Ron Paul, a longtime critic of the central bank. “Spending all this money hasn’t helped,” Mr. Paul said. The Fed’s aid programs benefitted financial companies, he said, while people “lost their job, and they lost their houses and mortgages, and they’re still in trouble.”

Mr. Paul, who recently announced that he would not run for re-election to focus instead on his presidential campaign, began on a lighter note, suggesting that news of his impending departure might have caused Mr. Bernanke to smile. Amidst the ensuing laughter, Mr. Bernanke was unable to resist.

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