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Published: Saturday, 10/16/2010

Fed chief hints at more action to boost economy

BLADE NEWS SERVICES

BOSTON - Citing the threat of prolonged high unemployment and an economy potentially falling into a dangerous deflationary spiral, Federal Reserve Chairman Ben Bernanke Friday outlined a case for the central bank to take action to bolster economic growth.

But the Fed chief also made it clear that there were long-term risks - for the economy and the Fed's credibility - in pumping hundreds of billions of dollars into the financial system.

Mr. Bernanke indicated that the Fed would pour money into the economy by resuming purchases of government, and possibly private, debt in a bid to lower interest rates and spur growth.

The likely impact would ripple far beyond U.S. shores.

The new actions could contribute to the weakening of the dollar.

For Americans, additional Fed activity is likely to mean that low 30-year mortgage rates could fall even further.

The moves would not help many savers, as yields on certificates of deposit and savings bonds probably would fall.

But the Fed hopes that by making credit even cheaper it will encourage businesses and consumers to borrow and spend, and that could eventually bring relief to jobless workers.

Mr. Bernanke's remarks, at a conference organized by the Federal Reserve Bank of Boston, confirmed Wall Street analysts' expectations that the Federal Open Market Committee would approve new steps at its next meeting Nov. 2-3.

The question now is not whether the Fed will resume the debt-buying strategy, but how much it will buy, and how quickly, analysts said. Mr. Bernanke did not offer such details.

The stock markets, which have risen since the Fed took a step in August toward additional monetary easing, largely shrugged off Mr. Bernanke's latest remarks.

Stocks ended mixed, with the Dow Jones industrial average slightly lower and the Standard & Poor's 500-stock index up slightly.

The economic outlook offered by Mr. Bernanke was sobering.

He said the rate of growth was "less vigorous than we would like," and that the unemployment rate was likely to "decline only slowly" next year, even as the recovery gains steam.

Mr. Bernanke centered his analysis on the Fed's "dual mandate" to foster maximum employment and price stability.

He said inflation was "too low" relative to the desired rate of "about 2 percent or a bit below," and that unemployment was "clearly too high" relative to Fed officials' long-run forecast of 5 percent to 5.25 percent.

"Given the committee's objectives, there would appear - all else being equal - to be a case for further action," he said.

"Preconditions for a pickup in growth next year remain in place," he said, indicating improvements in household finances, solid business investments, and a recovery in state and local tax revenues.

Some analysts doubt that the central bank's action next month will deliver a big punch.

"It's better than nothing, but it's not going to make a huge difference," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

The potential of a limited result from the Fed's intervention has some Fed officials reluctant to make the move.

Some policymakers worry that injecting hundreds of billions of dollars into the financial systems may lead to much higher consumer prices down the road and undermine the central bank's credibility as an inflation fighter.

Even as the Fed chief noted such concerns, he pointed to the risks of deflation - a broad decline in prices and wages - and an economy still hobbling from the depressed housing market and feeble private-sector job growth.

In that climate and with little chance of new major fiscal stimulus coming to support the economy, analysts say, Mr. Bernanke and his colleagues know they are falling short on both of the Fed's objectives - maximizing employment and maintaining price stability.

"It seems to me they have to try to do something," said Lyle Gramley, a former Fed official.



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