Federal Reserve Chairman Ben Bernanke Thursday said that aggressive new action from the central bank was justified in the face of concerns about a still-sluggish economy.
Bernanke spoke to reporters after the Fed announced plans to buy $40 billion of agency mortgage-backed securities each month, starting Friday.
In addition to embarking on a third round of quantitative easing, the Fed also extended its vow to keep interest rates at rock-bottom rates to mid-2015. Policy makers also decided to keep in place the Operation Twist program that swaps short-term bonds for longer-term assets.
The Fed also revised upward its projections for economic growth in 2013, suggesting an expectation that the move announced Thursday, in combination with policy actions from Congress, would further boost the economy.
The new projections forecast 2.5 to 3.0 percent annual GDP growth for the year, up from 2.2 to 2.8 percent growth predicted in June. The upper range of expectations for growth in 2014 was also revised up from 3.5 percent to 3.8 percent.
Bernanke said the new measures were needed to combat unemployment that remains persistently and unacceptably high.
Striking a populist tone, the high unemployment rate, now at 8.1 percent, is "imposing hardship" and a "tremendous waste of human skills and talents" in the broader economy, Bernanke said.
The Fed will continue its actions to support employment until it sees substantial and sustained improvements in both the labor market and the broader economy, Bernanke said.
And while the Fed will "as always" take appropriate action in the face of rising inflation, Bernanke went to great pains to emphasize that Fed efforts to improve the economy would not be pulled back at the first signs of improvement.
"The idea is to quicken the recovery… help the economy grow quickly enough to generate new jobs," he said.
He added, "We haven't at this point come up with a set of data we can put out" to determine when the Fed might pull back from its actions but any backing away is "not going to be premature… we're not going to rush to tighten policy… for some time."
At the same time, Bernanke said that the Fed remains aware and understanding of its dual mandate and the need to keep inflation under control.
However, he said, just because there are some signs of inflation in the recovery as "slack" from the recession is made up, that does not mean that the Fed will tighten monetary policy.
"We don't anticipate the economy overheating anytime soon," he said. He added, "We want to see more jobs. We want to see lower unemployment."
Bernanke repeatedly cautioned that there were limits to what the Fed can do on its own.
"Monetary policy is not a panacea," he said. "We can't solve this problem on our own."
He added, "We think we can make a meaningful contribution to this problem… but we can't solve it."
Specifically, Bernanke reiterated his warnings that Congress and the Administration need to take action to avoid the "fiscal cliff" of tax increases and spending cuts that are scheduled to go into effect at the beginning of the year.
The Congressional Budget Office has warned that if those policies - enacted as a measure to push lawmakers to reach a less painful deal - could cause unemployment to rise and even potentially push the economy back into recession.
"If the fiscal cliff isn't addressed … I don't think our tools are strong enough" to save the economy in the face of that kind of fiscal shock, Bernanke said.
He added, however, that he did hope and expect policymakers in Congress and the White House to take actions needed to avert that eventuality.
"Our tools are not so powerful that they can solve the problem [but we] are able, at least to provide meaningful support," he said. "If we have tools that we think can provide some assistance … our obligation is to do what we can."
by RTT Staff Writer
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