Bloomberg News

Bernanke Says More Stimulus Is ‘on the Table’ as Risks Remain

November 16, 2011

Nov. 2 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said unemployment is still “far too high” and the Fed may take further steps to boost growth, such as buying mortgage bonds or changing the way it communicates its policy goals to the public.

Additional stimulus “remains on the table,” Bernanke said today at a press conference in Washington, declining to specify conditions that would prompt a move. “While we still expect that economic activity and labor market conditions will improve gradually over time, the pace of progress is likely to be frustratingly slow.”

Bernanke spoke after the policy-setting Federal Open Market Committee said the economy picked up in third quarter and repeated its statement from September that there are “significant downside risks” to the outlook. Officials kept policy unchanged, saying they would lengthen the maturity of the Fed’s bond portfolio and hold the benchmark interest rate near zero through at least mid-2013 if unemployment remains high and the inflation outlook is “subdued.”

Bernanke and his colleagues on the panel cut their growth forecasts for 2012 and said unemployment will average 8.5 percent to 8.7 percent in the final three months of next year, up from a prior range of 7.8 percent to 8.2 percent.

“The medium-term outlook relative to our June projections has been downgraded” and “remains unsatisfactory,” Bernanke said. “Unemployment is far too high,” and “I fully sympathize with the notion that the economy is not performing the way we would like.”

Stocks Rebound

U.S. stocks rebounded from a two-day slump, the dollar fell and Treasuries pared losses after Bernanke’s comments.

The Standard & Poor’s 500 Index climbed 1.6 percent to 1,237.90 at the close of trading in New York. The Dollar Index slipped 0.2 percent, trimming an earlier drop of 0.7 percent. Treasury 10-year yields were unchanged at 1.99 percent, after jumping nine basis points earlier.

Sixty-nine percent of economists in a Bloomberg News survey expect the Fed to embark on a third round of bond buying, with a plurality of 36 percent of respondents seeing purchases beginning in the first quarter of 2012, according to an Oct. 26- 31 survey of 42 economists.

Policy makers voted in September to swap $400 billion of short-term debt in the Fed portfolio for longer-term securities to reduce interest rates in a strategy dubbed Operation Twist. They said they would reinvest proceeds from maturing housing debt into mortgage-backed securities, switching from Treasuries.

Set of Tools

Purchases of Treasury and mortgage bonds “are one set of tools that we have,” Bernanke said. If the FOMC “judges that we are falling sufficiently far short of our objectives in terms of inflation falling at or below its target and growth being insufficient, and that we believe monetary stimulus would be beneficial, then the committee obviously would try to take corrective action.”

Bernanke, 57, said there’s “no implication” that the Fed plans to raise interest rates in 2013, when Fed officials forecast the unemployment rate will be about 8 percent. He emphasized that the Fed’s statement doesn’t specify a date for an end to rates close to zero.

“The statement says at least mid-2013,” Bernanke said. “So clearly it could well be some point beyond that, and markets are currently anticipating a somewhat later lift-off.”

Policy makers discussed how they might clarify their expectations for the path of interest rates, Bernanke said. He said they talked about how to convey what conditions “would prevail at the time that we would be considering raising rates.”

Yellen Subcommittee

A subcommittee led by Fed Board Vice Chairman Janet Yellen has looked into publishing more precise information about the FOMC’s goals for prices and employment, and more guidance about how policy changes are linked to those goals, according to minutes of the Sept. 20-21 meeting.

FOMC members, including Governor Daniel Tarullo, are calling for further action. Tarullo said on Oct. 20 that buying additional mortgage bonds should “move back up toward the top of the list of options.” Such a move would lower mortgage rates, spurring home purchases and giving consumers who refinance more money to spend on other goods, he said.

Bernanke said buying more mortgage-backed securities is a “viable option” for the central bank. “The housing sector is a very important sector,” and adding to mortgage-bond holdings is “certainly something we would consider if conditions” are appropriate, he said.

Debt Purchases

The Fed purchased $2.3 trillion in debt from December 2008 through June in two rounds of so-called quantitative easing aimed at lowering borrowing costs for companies and consumers with the benchmark interest rate already at zero. The first round included mortgage debt, while the second was limited to Treasury securities.

Reduced home prices and tightened lending standards have slowed the pace of replacement home loans. The Mortgage Bankers Association forecast on Oct. 11 that refinancing this year would total $783 billion, down from $1.1 trillion last year, even amid lower interest rates. Refinancing peaked at a record $2.5 trillion in 2003.

The average rate on a typical 30-year fixed mortgage fell to a record low 3.94 percent in October, from this year’s high of 5.05 percent, before climbing to 4.10 percent last week, according to Freddie Mac survey data. In September, the FOMC voted to reinvest proceeds from maturing housing debt into mortgage-backed securities, switching from Treasuries.

Evans Dissent

The vote for today’s statement was 9-1. Chicago Fed President Charles Evans voted against the decision, the first dissent in favor of easier policy since Boston Fed President Eric Rosengren in December 2007. Evans favored “additional policy accommodation.”

At the last two meetings, Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Philadelphia’s Charles Plosser dissented against decisions to ease policy. They supported today’s statement.

“The committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability,” the statement said.

--With assistance from Josh Zumbrun and Craig Torres in Washington, Vivien Lou Chen in San Francisco and Steve Matthews in Atlanta. Editors: Christopher Wellisz, Gail DeGeorge

To contact the reporter on this story: Caroline Salas Gage in New York at

To contact the editor responsible for this story: Chris Wellisz at

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