US Federal Reserve Chairman Ben Bernanke said on Friday there was a case for further monetary easing given high unemployment and low inflation, but he offered no details on the central bank's next step. It was the most explicit signal yet from Bernanke that the US central bank is likely to ease as soon as its next meeting in November.
Inflation low, deflation a risk
-- Unemployment to drop only slowly, a risk to recovery
He also suggested the Fed could indicate a willingness to hold interest rates low for longer than currently expected. "There would appear - all else being equal - to be a case for further action," Bernanke said at a conference sponsored by the Boston Federal Reserve Bank.
US officials, however, argue the world stands to benefit from a healthier US economy. Bernanke said a prolonged period of high unemployment could choke off the US recovery and that the low level of inflation meant the risk of deflation - a dangerous downward slide in prices - was greater than desirable.
However, he said policymakers were still weighing how aggressive they should be if they decide to pursue a further round of asset buying, or quantitative easing, to push borrowing costs lower. "The only question left is the size and scope of QE," said Boris Schlossberg of GFT Forex in New York. The Fed pushed overnight interest rates to zero in December 2008 and then bought $1.7 trillion in government and mortgage-linked bonds to offer more support for the economy.
Policymakers have said further purchases of US Treasury debt would be the course they would most likely pursue to bolster the recovery, and most economists look for a new buying program on the magnitude of $500 billion. Bernanke said that while the central bank has the tools to ease financial conditions further, it still needed to proceed cautiously, adding that it was hard to calibrate the scope of purchases that might be necessary. "Nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used," he said.
Financial markets expect the Fed to launch a new round of asset purchases at its next meeting on November 2-3. The Fed's easy monetary policy, which pushed the dollar to a 10-month low against a broad basket of currencies on Friday, has drawn the ire of emerging market economies contending with a flood of capital as investors chase higher yields.
Many countries, worried about potential asset bubbles as well as weak exports, have taken steps to temper the rise in their currencies, sparking fears of a series of competing devaluations.
RECESSION OVER BUT UNEMPLOYMENT LINGERS: Even though the deep US recession ended in June 2009, unemployment still hovers at a lofty 9.6 percent, and Bernanke noted that core inflation, as measured by the Fed's favourite gauge, has risen at just a 1.1 percent annual rate this year. He emphasised that Fed officials would like to see inflation at about 2 percent or a bit below. The government said on Friday that the core consumer price index, a more popular inflation gauge, had risen just 0.8 percent over the 12 months through September, the smallest annual gain since 1961.
At the Fed's last policy-setting meeting on September 21, officials debated the possibility of introducing an explicit inflation target and other ways in which they could lift inflation expectations to spur economic activity. Bernanke made clear that a shift in communications policy could be a powerful tool in helping to ease financial conditions, and said the Fed could use its post-meeting statements to indicate the central bank intends to keep interest rates low for longer than financial markets expect.
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