As reported in Drudge Report

Sep 21, 7:41 AM
(ET)

By MARTIN CRUTSINGER

(AP) In this Sept. 30,
2010 file photo, Federal Reserve Chairman Ben Bernanke testifies on…
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WASHINGTON (AP) – The Federal Reserve is running out of options to try to
boost a slumping economy and lower unemployment. So policymakers are expected to
reach 50 years back into their playbook for their next move.

Most economists expect the Fed to announce a plan Wednesday to shift money in
its $1.7 trillion portfolio out of short-term securities and into longer-term
holdings.

The plan could lower Treasury yields further. Ultimately, it could reduce
rates on mortgages and other consumer and business loans, too.

Fed Chairman Ben Bernanke is expected to advocate the move despite criticism
from within the Fed and from Republican lawmakers and presidential candidates.

On Monday, the four highest-ranking Republicans in Congress sent Bernanke a
letter cautioning the Fed against taking further steps to lower interest rates.
Their letter suggested that lower rates could escalate the risk of high
inflation.

The plan the Fed is considered most likely to unveil Wednesday has been
dubbed “Operation Twist” and dates to the early 1960s. The Fed used a similar
program then to “twist” long-term rates lower relative to short-term rates.

Expectations that the Fed will do so again, along with renewed fears of
another recession, have led investors to buy up U.S. Treasurys. Treasury yields
have dropped in response.

The yield on the 10-year Treasury note last week touched a historic low of
1.87 percent. On Tuesday, it finished slightly higher, 1.93 percent.

Once the Fed announced last month that it would expand its September meeting
from one to two days, most economists have predicted that policymakers would
unveil some new step. Chairman Ben Bernanke has said that the Fed is considering
a range of options.

The central bank is under pressure to revive an economy that has limped along
for more than two years since the recession officially ended. In the first six
months of this year, the economy grew at an annual rate of just 0.7 percent. In
August, the economy didn’t add any jobs, and consumers didn’t increase their
spending on retail goods.

Most economists foresee growth of less than 2 percent for the entire year.
Many say the odds of another recession are about one in three.

The Fed has offered its own bleak outlook. At its August meeting, it said the
economy will likely struggle for at least two more years. As a result, it said
it planned to keep short-term rates near record lows until mid-2013, as long as
the economy remained weak.

The decision to do so highlighted a rift within the central bank. Three
members dissented from the Fed’s decision – the most negative votes in nearly
two decades. The three, all regional Fed bank presidents, said the Fed’s
policies have increased the risk of inflation.

Bernanke has also faced criticism from congressional Republicans and GOP
presidential candidates. Some have argued that the Fed’s $600 billion
bond-buying program, which ended in June, weakened the value of the dollar
against other currencies and contributed to a spike in oil and commodity prices.

Texas Gov. Rick Perry, who is seeking the GOP nomination for president, went
so far as to say Bernanke would be “almost treasonous” to launch more bond
buying.

Bernanke has said that the Fed could consider another round of bond
purchases. It could also provide more specific guidance on future interest rate
moves.

Or it could reduce the 0.25 percent interest the Fed pays banks on their
reserves at the central bank. Doing so would reduce the banks’ incentive to keep
money at the Fed and might make them more likely to lend.

But many analysts expect the Fed to opt for Operation Twist over those other
actions.

President Barack Obama has unveiled a $447 billion jobs program made up of a
combination of tax cuts and increased government spending. But the proposal
faces an uncertain fate in Congress, where Republicans are focused on efforts to
trim soaring budget deficits.

 

By Neil Irwin

Friday, August 27, 2010; 11:06 AM

JACKSON HOLE, WYO. – Federal Reserve Chairman Ben S. Bernanke acknowledged in a much-awaited speech Friday that the pace of economic growth “recently appears somewhat less vigorous” than expected, and said that the central bank would take new steps to bolster the economy if conditions worsen.

“The pace of recovery in output and employment has slowed somewhat in recent months,” Bernanke said at the Federal Reserve Bank of Kansas City’s annual economic symposium. “Despite this recent slowing, however, it is reasonable to expect some pickup in growth in 2011 and in subsequent years.”

Just this morning, the Commerce Department reported that gross domestic product rose at only a 1.6 percent annual rate in the April-through-June quarter, much worse than the 2.4 percent earlier estimated.

Bernanke said that the Fed’s policy committee “is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.”

“The issue at this stage” Bernanke said, “is not whether we have the tools to help support economic activity and guard against disinflation. We do. . . . The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.”

In other words, the economy has not deteriorated enough, nor the outlook changed enough, to warrant pulling out some big new monetary policy guns, but the Fed would be willing to do so if its forecast of continued slow-but-steady growth proves to be overly optimistic.

Bernanke enumerated the policy options on the table. At recent Fed policy meetings, he said, participants have discussed renewed large-scale purchases of Treasury bonds and other securities; pledging to keep the Fed’s short-term interest rate target near zero for even longer than analysts now expect; or cutting the rate paid on money that banks park at the Fed.

However, Bernanke explicitly rejected a notion, advanced by some economists outside the Fed, that the central bank temporarily increase its target for inflation. “I see no support for this option” on the Federal Open Market Committee, he said.

In discussing the trade-offs involved in undertaking a major new program to buy securities and thus expand the Fed’s balance sheet to try to boost growth, which is the most powerful of the tools under consideration, Bernanke noted various risks: that the central bank lacks precise knowledge of what effect the action would have; that the action would have the most impact in a time of financial market distress; and that the bigger balance sheet “could reduce public confidence in the Fed’s ability” to unwind the policies.

The speech is one of the most hotly anticipated of Bernanke’s tenure as Fed chairman, especially on Wall Street. In recent weeks, the economic situation has deteriorated markedly, and many forecasters now expect that the U.S. economy will grow much too slowly to bring down the unemployment rate in the second half of the year. Fed watchers were eager for Bernanke to offer clarity on what the approach of Fed policy is over the months ahead, particularly following an action at its Aug. 10 meeting to reinvest proceeds from maturing mortgage securities on its balance sheet.

In discussing the economy, Bernanke adopted a mixed tone, expressing confidence in growth over the medium term while acknowledging that the situation is disappointing at the moment. “In many countries, including the United States and most other industrial nations, growth during the past year has been too slow and joblessness remains too high,” he said.

“Incoming data on the labor market has been disappointing,” Bernanke added, while business investment in equipment and software “should continue to advance at a solid pace.”

The major drain on second-quarter gross domestic product was from trade. “Like others,” Bernanke said, we were surprised by the sharp deterioration in the U.S. trade balance in the second quarter. However, that deterioration seems to have reflected a number of temporary and special factors.”

The revision to gross domestic product data Friday is only the latest reminder of how far the economic outlook has fallen. Just in the past week, new data have indicated that the housing sector was in near free-fall in July, that business orders for big-ticket equipment contracted that month, and that new claims for unemployment insurance benefits remained at recessionary levels last week.

Bernanke takes a measure of optimism from recent reports that Americans are saving more. Although a higher savings rate – about 6 percent, compared with the 4 percent earlier estimated – has helped depress consumption in recent months, in the longer term, he said, it “implies greater progress in the repair of household balance sheets,” which should in turn allow Americans to increase their spending more rapidly in the future.

In the speech, Bernanke made an effort to try to dissuade listeners from the idea that the Fed, or any central bank, can create a return to prosperity on its own. “A return to strong and stable economic growth will require appropriate and effective response from economic policymakers across a wide spectrum, as well as from leaders in the private sector,” he said. “Central bankers alone cannot solve the world’s economic problems.”