Ben S. Bernanke laid the groundwork for a third round of large-scale asset purchases should unemployment remain higher than the Federal Reserve would like while inflation falls below a newly-established target.
The Federal Open Market Committee "recognizes the hardships imposed by high and persistent unemployment in an underperforming economy, and it is prepared to provide further monetary accommodation," Bernanke said yesterday at a press conference in Washington.
Stocks and Treasuries rallied after policy makers said the benchmark interest rate would stay low until at least late 2014, pushing back a previous date of mid-2013. Fed officials also lowered their projections for economic expansion and inflation for this year and next.
"It was an unambiguous, aggressive statement," said Julia Coronado, chief economist for North America at BNP Paribas in New York. "My expectation is that we are going to get quantitative easing three in April," she said, referring to a third round of bond buying.
The U.S. central bank's "two main tools" to boost growth are asset purchases and communications, and bond buying is "an option that is certainly on the table," Bernanke said. "The unemployment level is elevated and the inflation outlook is subdued."
Policy makers yesterday set a long-term goal of 2 percent inflation, and forecast that price increases would fall short of that target this year and next. The personal consumption expenditures price index (SPX) climbed 2.5 percent for the 12 months ending in November.
David Fuller's view Some commentators have remarked that in suggesting it might keep interest rates low until at least late 2014, the Federal Reserve is signalling that the economic outlook is likely to remain perilous. While possible, and one should remain cautious about economic growth in a deleveraging economy, one should not be overly pessimistic, in my view.
Thanks to its outstanding multinational corporate sector - companies which Fullermoney describes as Autonomies - the US economy is clearly doing better than many economists expected, albeit with the help of the Fed's massive stimulus.
Mr Bernanke is addressing the unemployment portion of the Fed's dual mandate, as he should. With many businesses talking about uncertainties in the US economy, the Fed can at least offer reassurances that monetary policy will remain accommodative for so long as necessary.
No one knows what the economic environment will be like by late 2014. Meanwhile, the problem that Mr Bernanke hopes to delay indefinitely is the next widespread increase in inflationary expectations. By purchasing more US Government bonds he can keep long-term interest rates lower than might otherwise occur.
If low interest rates encourage more businesses to invest in the US economy, they might hire more people rather than just upgrading technology. Whether we agree with his policies or not, we cannot fault Mr Bernanke for effort.