Federal Reserve to Take Further Steps to Rejuvenate Economy

(NECN: Peter Howe, Boston) Federal Reserve Chairman Ben S. Bernanke made a rare visit to the Hub Friday, pleasing investors by saying he sees reason for the Fed to take still more steps to push down interest rates and pump up the economy.

"There would appear -- all else being equal -- to be a case for further action,'' Bernanke said at the beginning of a two-day conference at the Federal Reserve Bank of Boston on the challenges fiscal policymakers face when interest rates and inflation are both close to zero.

At the height of the recession, the Fed came to own $1.7 trillion worth of bonds and other investments. In his remarks, Bernanke indicated it may be time for the Fed to do another round of bond-buying to bring down longer-term interest rates. Theoretically that would encourage businesses and homeowners to borrow and spend more and boost the economy.

"Empirical evidence suggests that our previous program of securities purchases was successful in bringing down longer-term interest rates and thereby supporting the economic recovery,'' Bernanke said. "However, possible costs must be weighed against the potential benefits of non-conventional policies.''

"With growth in private (sector) demand having so far proved relatively modest, overall economic growth has been proceeding at a pace that is less vigorous than we would like. In particular, consumer spending has been inhibited by the painfully slow recovery in the labour market,'' Bernanke said.

Bernanke spoke at length about how he's concerned inflation right now is actually too low. And he said one of the best things the Fed might be able to do now is -- instead of the usual bland, opaque style of communication called "FedSpeak" -- to state more explicitly just how low the Fed will keep key interest rates and for how long.

"The most recent statements have reflected the (Fed's) anticipation that exceptionally low levels of the federal funds rate are likely to be warranted 'for an extended period,' contingent on economic conditions. A step the Committee could consider, if conditions called for it, would be to modify the language of the statement in some way that indicates that the Committee expects to keep the target for the federal funds rate low for longer than markets expect. Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations ... Improving the public's understanding of the central bank's policy strategy reduces economic and financial uncertainty and helps households and firms make more-informed decisions. Moreover, clarity about goals and strategies can help anchor the public's longer-term inflation expectations more firmly and thereby bolsters the central bank's ability to respond forcefully to adverse shocks.''

While Bernanke warned unemployment will "persist for some time," his overall outlook is modestly positive. "Although the pace of recovery has slowed in recent months and is likely to continue to be fairly modest in the near term, the preconditions for a pickup in growth next year remain in place. Stronger household finances, a further easing of credit conditions, and pent-up demand for consumer durable goods should all contribute to a somewhat faster pace of household spending.''

With videographer Daniel Ferrigan