PRINCETON, New Jersey: Federal Reserve Chairman Ben Bernanke said on Friday, Sept 24 it was unclear whether the U.S. economy would be relegated to the type of slow recovery that typically follows a financial crisis.
Bernanke said the U.S. central bank hopes an aggressive policy response will prompt a speedier than normal economic recovery than the historic norm.
"In some episodes in the past it may be also that maybe governments and policymakers weren't aggressive enough in fixing their financial systems and using monetary and fiscal policy appropriately," he said. "And certainly the Federal Reserve has been quite aggressive ... so we're hopeful to get a better result," he said.
Bernanke, in a speech three days after the Fed said it stood ready to provide renewed stimulus if the weak recovery needed further support, offered no guideposts to the central bank's next step.
He said the recovery was so far too weak to drag down the jobless rate, but did not discuss the outlook in any further detail.
"Although financial markets are for the most part functioning normally now, a concerted policy effort has so far not produced an economic recovery of sufficient vigor to significantly reduce the high level of unemployment," he said.
The Fed after its August policy-meeting said inflation was below desirable levels and that it would step in if necessary.
Many analysts now expect the U.S. central bank to relaunch large-scale purchases of Treasury securities -- perhaps as soon as its next meeting in November -- in light of forecasts of continued high unemployment for months to come.
However, comments by two other Fed officials on Tuesday illustrate the challenges Bernanke faces in achieving consensus within the central bank if he decides the U.S. economy is weak enough to warrant further monetary easing.
One official who is among the Fed's most inflation-focused hawks, Richmond Federal Reserve Bank President Jeffrey Lacker, said the currently low U.S. inflation rate does not necessarily mean the economy is at high risk of a troubling downward price spiral.
Lacker, who is not a voter on the Fed's rate-setting panel until 2012, told reporters after a speech in Frankfort, Kentucky, he was not worried about a vicious circle in which consumers and businesses put off purchases, dragging down the economy.
"I don't see the risk of an outbreak of deflation as very high at all right now," he said. "It's quite possible for inflation to run between 1 percent and 1-1/2 percent for quite some time without us spiraling into deflation."
Most Fed officials aim for an inflation rate in the 1.7 percent to 2 percent range, although Lacker said he preferred it at a somewhat lower 1.5 percent.
The Fed's favorite core price gauge was up 1.4 percent in the 12 months through July, although the more popular underlying consumer price index has been running at just 0.9 percent. Fed officials look at core prices to get a sense of the underlying inflation trend.
Another one of the Fed's most vigilant anti-inflation hawks, Philadelphia Federal Reserve Bank President Charles Plosser, told a conference in Switzerland that he believes there should be limits to how big the Fed's balance sheet can get.
"My view is that without explicit constraints on the size of the balance sheet, the Fed runs the risk of being pressured to use its balance sheet to engage in policies whose goals have nothing to do with monetary policy," Plosser said.
The Fed's $1.7 trillion asset buying spree from 2009 into the early part of this year more than doubled its balance sheet from pre-crisis levels. Any further securities shopping aimed at easing financial conditions would bloat the balance sheet even more.
Plosser said constraints would help the Fed maintain its independence and inflation-fighting credibility. It would "give the central bank a mechanism for saying no to fiscal authorities who may want to use the central bank's balance sheet to achieve other objectives," Plosser said.
Plosser, who joins the ranks of voting Fed policy makers next year, did not address the outlook for monetary policy or the economy. - Reuters
Bernanke said the U.S. central bank hopes an aggressive policy response will prompt a speedier than normal economic recovery than the historic norm.
"In some episodes in the past it may be also that maybe governments and policymakers weren't aggressive enough in fixing their financial systems and using monetary and fiscal policy appropriately," he said. "And certainly the Federal Reserve has been quite aggressive ... so we're hopeful to get a better result," he said.
Bernanke, in a speech three days after the Fed said it stood ready to provide renewed stimulus if the weak recovery needed further support, offered no guideposts to the central bank's next step.
He said the recovery was so far too weak to drag down the jobless rate, but did not discuss the outlook in any further detail.
"Although financial markets are for the most part functioning normally now, a concerted policy effort has so far not produced an economic recovery of sufficient vigor to significantly reduce the high level of unemployment," he said.
The Fed after its August policy-meeting said inflation was below desirable levels and that it would step in if necessary.
Many analysts now expect the U.S. central bank to relaunch large-scale purchases of Treasury securities -- perhaps as soon as its next meeting in November -- in light of forecasts of continued high unemployment for months to come.
However, comments by two other Fed officials on Tuesday illustrate the challenges Bernanke faces in achieving consensus within the central bank if he decides the U.S. economy is weak enough to warrant further monetary easing.
One official who is among the Fed's most inflation-focused hawks, Richmond Federal Reserve Bank President Jeffrey Lacker, said the currently low U.S. inflation rate does not necessarily mean the economy is at high risk of a troubling downward price spiral.
Lacker, who is not a voter on the Fed's rate-setting panel until 2012, told reporters after a speech in Frankfort, Kentucky, he was not worried about a vicious circle in which consumers and businesses put off purchases, dragging down the economy.
"I don't see the risk of an outbreak of deflation as very high at all right now," he said. "It's quite possible for inflation to run between 1 percent and 1-1/2 percent for quite some time without us spiraling into deflation."
Most Fed officials aim for an inflation rate in the 1.7 percent to 2 percent range, although Lacker said he preferred it at a somewhat lower 1.5 percent.
The Fed's favorite core price gauge was up 1.4 percent in the 12 months through July, although the more popular underlying consumer price index has been running at just 0.9 percent. Fed officials look at core prices to get a sense of the underlying inflation trend.
Another one of the Fed's most vigilant anti-inflation hawks, Philadelphia Federal Reserve Bank President Charles Plosser, told a conference in Switzerland that he believes there should be limits to how big the Fed's balance sheet can get.
"My view is that without explicit constraints on the size of the balance sheet, the Fed runs the risk of being pressured to use its balance sheet to engage in policies whose goals have nothing to do with monetary policy," Plosser said.
The Fed's $1.7 trillion asset buying spree from 2009 into the early part of this year more than doubled its balance sheet from pre-crisis levels. Any further securities shopping aimed at easing financial conditions would bloat the balance sheet even more.
Plosser said constraints would help the Fed maintain its independence and inflation-fighting credibility. It would "give the central bank a mechanism for saying no to fiscal authorities who may want to use the central bank's balance sheet to achieve other objectives," Plosser said.
Plosser, who joins the ranks of voting Fed policy makers next year, did not address the outlook for monetary policy or the economy. - Reuters
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