Fed Would Act if Needed, Chairman Says

Fed Would Act if Needed, Chairman Says
By SEWELL CHAN
copyright by Reuters News
Published: July 22, 2010
http://www.nytimes.com/2010/07/23/business/23fed.html?_r=1&hpw


WASHINGTON — A day after stating that the Federal Reserve had no imminent plans to provide additional support to the economy, its chairman, Ben S. Bernanke, emphasized on Thursday that the central bank was prepared to take action if needed.

“We are ready, and we will act, if the economy does not continue to improve, if we don’t see the kinds of improvements in the labor market that we hope for,” Mr. Bernanke told Representative Melvin L. Watt, Democrat of North Carolina, in the second of two days of hearings on monetary policy.

“We would have to step into new areas,” Mr. Bernanke told Mr. Watt at a meeting of the House Financial Services Committee, after Mr. Watt asked if the Fed could take additional steps to combat the 9.5 percent unemployment rate. “I do believe there are things we can do, and we are considering all options.”

In delivering the Fed’s semiannual monetary policy report to Congress on Wednesday, Mr. Bernanke sent a two-part message. On the one hand, he warned of “unusual uncertainty” in the markets — a note of caution that immediately sent stock markets in the United States heading downward. On the other hand, he said the Fed had no immediate plans to deploy additional tools of monetary stimulus.

The Fed has already held the main short-term interest rate it controls at nearly zero since December 2008, and bought more than $1.5 trillion in mortgage-backed securities and other government debts to place downward pressure on long-term interest rates.

Mr. Bernanke outlined on Thursday three options being discussed by the Fed, but told Mr. Watt, “The effectiveness of these actions would depend in part on financial conditions. If financial conditions became more stressed, I think those steps would be more effective, relatively speaking.”

First, he said, the Fed could make clear to the markets that it planned to keep the federal funds rate, currently set at zero to 0.25 percent, for even longer than the “extended period” it has been projecting for months.

Second, the Fed could lower the interest rate it pays on excess reserves — deposits banks hold at the Fed in excess of what they are required to — from its current level of 0.25 percent.

Third, the Fed could expand its balance sheet, which already stands at $2.3 trillion, primarily by purchasing additional assets, whether in the form of additional government debts and mortgage bonds, or in the form of new assets, like municipal bonds.