Bernanke: More Asset Purchases Could Boost Economy

¹²More Asset Purchases Could Boost Economy, Bernanke Says

By Luca Di Leo and Sudeep Reddy | 5 October 2010

PROVIDENCE, R.I.— Federal Reserve Chairman Ben Bernanke said Monday he believes further asset purchases by the central bank could help the economy, a signal that the Fed is likely to make the move if the economic outlook remains weak. Speaking to college students, Mr. Bernanke said that even after the Fed cut short-term interest rates nearly to zero, it was able to lift the economy by buying $1.7 trillion of U.S. Treasury and mortgage-backed bonds in what he described as an "effective program."

Read More: Cheat Sheet— Highlight of Fed speeches

"Additional purchases have the ability to ease financial conditions," he said. Fed officials at their policy meeting last month said they were prepared to take further steps to aid the recovery if the economy remains sluggish. The most likely move would be to buy more U.S. Treasurys.

Mr. Bernanke's comments follow indications from other Fed officials that the central bank is increasingly likely to move ahead with more asset purchases, perhaps at its early November meeting, barring a surprise improvement in economic data. On Friday, for instance, Federal Reserve Bank of New York President William Dudley called the current economic environment of low inflation and high unemployment "unacceptable". And at remarks at a conference on Monday, Brian Sack, executive vice president of the New York Fed and its point person on markets, said despite the Fed's prior asset purchases, "it is not clear that we have yet reached a point of diminishing effects."

"The evidence suggests that the expansion of the securities portfolio to date has helped to foster more accommodative financial conditions, and further expansion would likely provide additional accommodation," Mr. Sack said. Separately, the Federal Reserve Board in Washington on Monday swore in two new members, both are likely to be Bernanke allies if he pursues more asset buying, or quantitative easing. Janet Yellen, previously president of the Federal Reserve Bank of San Francisco, became the Fed board's vice chairman. Sarah Bloom Raskin, who had been state financial regulator in Maryland, became a Fed governor.

The additions marked the first time in 13 years that three women have served on the Fed's seven-member board in Washington. One slot remains unfilled. The Senate hasn't voted on the nomination of Massachusetts Institute of Technology economist Peter Diamond. Speaking at a separate Rhode Island event Monday, Mr. Bernanke said U.S. public finances are on an "unsustainable path" in the long run largely due to an aging population and continual rise in health-care costs.

He said the nation would face "serious economic costs and risks" if it failed to address the situation. In the short run, "concerns and uncertainty about exploding future deficits could make households, businesses, and investors more cautious about spending, capital investment, and hiring," he said in remarks prepared for a meeting of the Rhode Island Public Expenditure Council. "In the longer term, a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity, and economic growth."