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Bernanke: Fed will weigh aid

By Staff | Sep 9, 2011

WASHINGTON – Federal Reserve Chairman Ben Bernanke said Thursday that policymakers will discuss the tools they could use to boost the recovery at their next meeting this month and stand ready to use them if necessary.

Policymakers “are prepared to employ these tools as appropriate to promote a stronger economic recovery in the context of price stability,” Bernanke said in the text of a speech to economists in Minneapolis.

As in a speech on Aug. 26 in Jackson Hole, Wyo., the Fed chief stopped short of signaling what he thinks is the Fed’s best option to aid the economy.

He said in previous remarks that the Fed’s options to bolster the recovery include lengthening the average duration of securities in its $1.65 trillion Treasury portfolio and buying more government bonds.

“This market is looking for assistance and what it wants is a wheelchair and someone to push it,” said Burt White, who helps oversee $330 billion as chief investment officer at LPL Financial in Boston.

Bernanke, echoing another comment from Jackson Hole, said that fiscal tightening by Congress may hobble the fragile economic recovery.

“A substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring,” he said. Policymakers are scheduled to meet Sept. 20-21.

While Bernanke said Congress and President Barack Obama must put the federal government’s finances on a “sustainable trajectory” over the long term, he warned that policymakers should not “disregard the fragility of the economic recovery.”

On inflation, Bernanke said, “we see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy.”

The speech is the first time Bernanke has commented about the economy since a government report last week showed that hiring stalled in August.

Employers did not add any net new jobs to their payrolls last month, the worst showing in almost a year, and the unemployment rate remained stuck at 9.1 percent.

The Fed will decide at its September meeting whether to replace short-term Treasury securities in its portfolio with long-term bonds in an effort to lower rates on everything from mortgages to car loans, according to predictions from economists at Wells Fargo, Barclay’s Capital and T. Rowe Price Associates.

The Fed still has other tools at its disposal to aid the economy. It could cut the 0.25 percent interest rate it pays banks on the $1.6 trillion in excess reserves parked at the Fed. It also could pledge to keep record monetary stimulus in place until unemployment drops to a certain level or inflation rises to a specific threshold.

That’s similar to the suggestion made Wednesday by Chicago Fed President Charles Evans in a speech in London. He said the Fed’s commitment to low interest rates should be made contingent on pushing up the unemployment rate to 7 percent or 7.5 percent, as long as inflation stays below 3 percent.

Bernanke warned in his Jackson Hole speech that the Fed alone can’t lift sagging home price, mitigate a wave of home foreclosures, or put 14 million unemployed American back to work.

Claims for U.S. unemployment benefits rose last week, a sign the labor market is struggling to gain traction more than two years after the recession ended.

Jobless claims rose by 2,000 to 414,000 in the week ended Sept. 3, Labor Department figures showed Thursday in Washington. Economists surveyed by Bloomberg News projected a drop in claims to 405,000, according to the median forecast.

Companies are stepping up the pace of firings, raising the risk that consumer spending will slow further. U.S. consumer confidence last week fell to the second-lowest level this year as Americans grew more pessimistic about the world’s largest economy.

The Bloomberg Consumer Comfort Index was minus 49.3 in the period to Sept. 4 compared with minus 49.1 the previous week. This year’s low of minus 49.4 was reached in May, when gasoline prices were the highest in three years.

The economy is flagging more than two years after the recession ended. The Fed reported yesterday that the recovery slowed in some regions of the country during July and August as factories curbed production and consumers limited their spending.

Growth in the second half of this year probably will come in at a 2.3 percent annual rate, according to the median forecast of 53 economists polled by Bloomberg News from Aug. 2 to Aug. 10.

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