Bernanke gives push to new stimulus as US outlook lowered
WASHINGTON / NEW YORK - US Federal Reserve Chairman Ben S. Bernanke signaled additional monetary stimulus may be needed to lower US unemployment as policymakers projected little acceleration in growth after last quarter's pickup.
Potential actions are "on the table", including a third round of securities purchases, extending the period of record-low interest rates or being more specific about when rates would rise, Bernanke said on Wednesday after officials met in Washington. Stocks added to gains while the dollar weakened against the euro.
Bernanke warned that economic improvement will probably be "frustratingly slow", with policymakers predicting a 1 percentage-point drop in the jobless rate to about 8 percent over two years.
The chairman said buying mortgage bonds is a "viable option," comments that give the idea an "extra push" and increase already high odds of the move, said Neal Soss, chief economist at Credit Suisse.
"He repeatedly referred to his disappointment with his best judgment about the economy's prospects," said Soss, who was an aide to former Fed Chairman Paul Volcker. "If you're unsatisfied, and you've got some tool that might help, in due course you're supposed to use it."
Additional easing may occur by February and could coincide with possible actions by new European Central Bank President Mario Draghi to contain fallout from the continent's sovereign-debt crisis, Soss said.
Bernanke's comments and the lowered economic projections followed a Federal Open Market Committee (FOMC) statement saying "significant downside risks" remain to the outlook even after third-quarter growth "strengthened somewhat". The risks include "concerns about European fiscal and banking issues", said Bernanke.
Officials left unchanged their plans to lengthen the maturity of the Fed's bond portfolio, known as Operation Twist, and to keep the target federal funds rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook remains "subdued".
The Standard & Poor's 500 Index rose 1.6 percent on Wednesday to 1,237.90, the first gain in three days. The dollar weakened 0.3 percent to $1.3747 against the euro. Yields on 10-year Treasuries were little changed at 1.99 percent.
Fed governors and regional presidents projected that gross domestic product, adjusted for inflation, will rise by 2.5 percent to 2.9 percent next year, compared with a range of 3.3 percent to 3.7 percent from the prior forecast in June.
Growth in 2013 is predicted to be 3 percent to 3.5 percent, lower than the prior range of 3.5 percent to 4.2 percent.
The jobless rate in the fourth quarter of 2012 will range from 8.5 percent to 8.7 percent, up from the previous forecast of 7.8 percent to 8.2 percent, the Fed said in a separate release.
The old 2012 projection is now the new 2013 projection for fourth-quarter unemployment of 7.8 percent to 8.2 percent, compared with a range of 7 percent to 7.5 percent in June. By the end of 2014, the jobless rate will be 6.8 percent to 7.7 percent, officials said in their initial projections for the year.
"The medium-term outlook relative to our June projections has been downgraded" and "remains unsatisfactory", Bernanke said on Wednesday. "Unemployment is far too high", and "I fully sympathize with the notion that the economy is not performing the way we would like", he said.
Stocks have climbed and the economy has picked up since the last FOMC gathering on Sept 20 and 21. The S&P 500 Index advanced 11 percent in October, the best since 1991, as European leaders agreed to expand their bailout fund. The rally snapped five months of losses.
Bloomberg News
