Bernanke Treasury Purchase Program

WASHINGTON — Federal Reserve Chairman Ben Bernanke says the central bank is prepared to take steps to rejuvenate the economy by buying government bonds but is wrestling with how big the program should be.

“There would appear — all else being equal — to be a case for further action,” Bernanke said Friday in a speech to a conference at the Federal Reserve Bank of Boston.

Stocks and stock futures mostly rose after Bernanke’s remarks. But the prospect of more dollars swirling around the financial system didn’t help the dollar, which slid against most currencies after his remarks.

Bernanke said the Fed must weigh the risks of a Treasury-buying program and determine how the purchases would be paced. The Fed’s bond purchases would be intended to pump cash into the economy to stimulate lending and help lower unemployment.

Fed policymakers are widely expected to announce a Treasury buying program at their meeting Nov. 2-3.

Bernanke also indicated that policymakers are trying to craft a plan to strengthen the economy and lift inflation from super-low levels.

The economy is growing at a pace “less vigorous than we would like,” Bernanke acknowledged.

Unemployment, now 9.6%, has been stuck near double digits more than a year. Bernanke indicated the Fed is concerned that economic growth is likely to remain lackluster and that unemployment will decline only slowly next year. High unemployment is likely to keep consumers cautious about spending.

Because the economy is weak, “the risk of deflation is higher than desirable,” Bernanke said.

For now, the Fed is more interested in seeing prices rise — rather than fall.

As Bernanke was speaking, the government issued a report that pointed to why a new Treasury-buying program may be necessary to ward off deflation: Consumer prices excluding the volatile categories of food and energy were flat or a second straight month.

A prolonged drop in prices for goods, for wages and in the values of homes and stocks is dangerous for the economy and Americans’ pocketbooks. It makes paying down debt much harder, causing more people to fall into foreclosures, default on credit card bills and companies to slide into bankruptcy.

Bernanke’s comments come as the Fed is weighing steps to try to raise people’s expectations of where they think inflation is heading.

If the Fed were to communicate that it will tolerate a higher-than-normal rate of inflation, that could make companies feel more inclined to nudge up prices. Shoppers, thinking prices would be rising further in the future, would be more inclined to make purchases sooner. That would lift inflation from worrisome low levels.

Such a move would push “real” or inflation-adjusted interest rates, down, which could spur more spending. Fed officials at the September meeting noted that it has ways to try to influence people’s expectations of inflation.

One way was to include information in the minutes of the Fed meetings to try to shape people’s expectations about inflation.

Article found in USA Today

M. Germaine Parra
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Long and Foster Realtors
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