Fed stands by to boost US growth

Ben Bernanke said on Friday that the Federal Reserve stood ready to boost the flagging US economy and had the tools to do so, including increasing holdings of long-term assets such as Treasury bonds and other securities.

The comments by the chairman of the Federal Reserve came in his most eagerly awaited speech, for months, with markets growing increasingly concerned about the weak economy and chronically high unemployment.

There was further bad news on Friday with the release of updated figures for economic output in the second quarter, with growth at an annualised rate revised down from 2.4 per cent to 1.6 per cent.

“The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do,” Mr Bernanke said in a speech at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming.

The only issue, he said, is whether “the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool”. Mr Bernanke said that the Fed was ready to act “especially if the outlook were to deteriorate significantly”.

But he did not spell out how bad a deterioration would be needed to trigger further action by the Fed, an omission that highlights divisions on the rate-setting Federal Open Market Committee about the need for action.

Treasury yields rose after Mr Bernanke spoke, as the market had expected an indication of more bond buying or quantitative easing by the central bank.

Richard Volpe, co-head of interest rates at RBS Securities, said: “The chairman has raised the bar for the market, as we can expect more QE only if the economy deteriorates significantly.”

Outlining “unconventional” ammunition the Fed could use, Mr Bernanke pointed to additional purchases of long-term securities, changing the language of the Fed’s statements and reducing interest paid on excess reserves.

Mr Bernanke said that there was no support within the Fed to increase its medium-term inflation goals above levels consistent with price stability.

“Such a step might make sense in a situation in which a prolonged period of deflation had greatly weakened the confidence of the public in the ability of the central bank to achieve price stability, so that drastic measures were required to shift expectations,” Mr Bernanke said. In the short term, Mr Bernanke said that preconditions for a pick-up in growth in 2011 “appear to remain in place”.

In spite of the sharp downward revision in second quarter output, many economists were encouraged by the figure which was generally less ominous than feared.

“By encouraging, we mean, sub par growth is substantially better than a double dip,” said Constance Hunter, chief economist of Aladdin Capital.