U.S. Federal Reserve chief Ben Bernanke told Congress today the nation's central bank was ready to approve a little more quantitative easing, buying government bonds from banks to keep the economy from backsliding into a recession. In his prepared remarks to the House Financial Services Committee, Bernanke also said persistent economic weakness, combined with the threat of deflation, implied a "need for additional policy support." Bernanke said the Fed would hold the interest rate at a low level for quite a while.
Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally.
The dismal jobs report from last week, combined with "temporary shocks holding down economic activity," as Bernanke put it, have put pressure on the Fed chief to use his policy-setting power to encourage economic growth. But some of the Fed's stimulus policies, namely its asset purchases, have proved controversial. A great Planet Money explainer on quantitative easing highlights the basic problem with the strategy: "Nobody really knows if this works. It's still really controversial among economists. It's only been tried a few times and, as in the case of Japan, hasn't had the greatest results." But it's only one of the Fed's tools, Bernanke said, along with its benchmark interest rate and the interest it pays on its reserves. At this writing, Bernanke is still addressing the committee. There's a live C-Span feed if you want to check it out.
This article is from the archive of our partner The Wire.
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