Thursday, 04 Nov 2010 07:03 AM
Federal Reserve Chairman Ben Bernanke, fresh from announcing
new measures to support the U.S. economy, said the central
bank's aggressive monetary policy will not spark unwanted
inflation in the future.
Bernanke, in an opinion piece to be published on Thursday in The
Washington Post, argued that the bigger risks facing the country
right now are an unemployment rate that remains too high and
inflation readings that are uncomfortably low.
"Inflation that is too low can pose risks to the economy —
especially when the economy is struggling. In the most extreme
case, very low inflation can morph into deflation, which can
contribute to long periods of economic stagnation," Bernanke
wrote.
The Fed on Wednesday announced it would buy an additional $600
billion in government bonds through the middle of next year, a
widely telegraphed decision that has been accompanied by some
doubts about its likely effectiveness.
Opponents of the measure say it is only sowing the seeds of
future inflation, a concern Bernanke said was "overstated"
because the economy was currently operating so far below its
full potential.
"Even absent (deflation) risks, low and falling inflation
indicate that the economy has considerable spare capacity,
implying that there is scope for monetary policy to support
further gains in employment without risking economic
overheating," the Fed chief said.
Bernanke also beat back worries about whether asset purchases
and their effect on financial markets can have a discernible
positive effect on U.S. economic activity, which expanded at a
meager 2 percent annualized clip in the third quarter.
By boosting the prices of stocks and corporate bonds, he said,
the Fed's bond buying can — and already has to some extent —
stimulate the sort of investment that will begin to put a dent
on the nation's 9.6 percent unemployment rate.
"Easier financial conditions will promote economic growth," he
said.
"Lower corporate bond rates will encourage investment. And
higher stock prices will boost consumer wealth and help increase
confidence, which can also spur spending."
Still, Bernanke acknowledged that the idea of conducting
monetary policy through longer-dated asset buying is relatively
unfamiliar, adding that this has caused the Fed to proceed
cautiously.
He reiterated the notion that the central bank has the tools it
needs to withdraw monetary stimulus if inflation looks to be
rising too rapidly.
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