Bernanke: More Fed help if needed
With the recovery fragile, he tried to reassure. But the Dallas Fed chief had a darker view.
WASHINGTON - Federal Reserve Chairman Ben S. Bernanke said Wednesday the central bank was prepared to provide additional stimulus if the economic lull persisted.
Delivering his twice-a-year economic report to Congress, Bernanke laid out three options the Fed would consider. One, he said, was another round of Treasury bond buying. That would make the third such effort since 2009 - including one that ended June 30.
The Fed chief's reassurances helped drive stock prices higher during the morning, but they also underscored the fragile state of the economy more than two years after economists said the recession had ended. Unemployment has risen for three straight months - to 9.2 percent in June - and a debt crisis in Greece and other European countries threatens to weaken the global economy.
Most of the market gains evaporated in the afternoon on comments by Richard Fisher, president of the Federal Reserve Bank of Dallas, who said the Fed already had "pressed the limits" of its ability to stimulate the economy. At the close, the Dow Jones industrial average was up just 44 points, about a third of its earlier gain.
In his testimony, Bernanke warned lawmakers that their failure to raise the nation's borrowing limit by Aug. 2 could trigger a financial crisis. He said that if the federal government defaulted on its debt, it would throw "shock waves through the entire financial system."
Bernanke said more stimulus would be necessary only if economic conditions worsened and deflation reemerged as a threat. Deflation is a destabilizing period of falling prices. While lower prices may appear to be a good thing for consumers, deflation also means lower interest rates and stock prices for investors, and lower wages for workers.
He also said the Fed was nimble enough to respond if the opposite happened - that is, a period of high inflation. He said the Fed was ready to raise interest rates that have been held at record lows for nearly three years, should the central bank fear a greater risk of inflation.
"We have to keep all options on the table," Bernanke told the House Financial Services Committee on the first of two days of Capitol Hill testimony. "If we get to the point where the recovery is faltering" and inflation is dropping toward zero, then the central bank would consider the additional stimulus options, he said. He will address the Senate on Thursday.
In addition to purchasing Treasury bonds, Bernanke said the Fed could help the economy by:
Cutting the interest paid by the Fed to banks on the reserves they hold as a way to encourage them to lend more.
Communicating in more explicit terms how long it planned to keep rates at record-low levels. That would give investors confidence about the Fed's efforts to continue supporting the economy.
The Fed last month agreed to end on schedule its program to boost the economy through the purchase of $600 billion in Treasury bonds.