The Federal Reserve's raft of new stimulus
measures were needed amid "grave concern" over US joblessness and the
struggling economy, but the central bank's tools were not a panacea
for the economy, Ben Bernanke, head of the US central bank, said
Bernanke spoke to reporters for 50 minutes after the Fed announced a new open-ended programme to buy mortgage securities and provide other infusions to the economy.
Looking at the "fiscal cliff" that looms if the gridlocked Congress cannot agree on taxes and spending, Bernanke warned that the bank would have limited ability to bail out the country in that event. His remarks were an indirect admonishment to Congress that it needed to resolve its standoff and set the stage for improved economic growth.
"If the fiscal cliff isn't addressed, I don't think our tools are strong enough to offset the effects of a major fiscal shock," Bernanke said.
Last month, the nonpartisan Congressional Budget Office warned that the United States was heading for recession by early 2013 if politicians fail to avert the looming budget cuts and tax increases now contained in a bridging agreement.
A decision on that deal will likely be postponed for another six months, but Bernanke warned that the longer the decision is postponed, the more uncertainty prevails over business investment decisions.
He said that reserve bank officials who met Wednesday and Thursday had "considerable discussion" about the uncertainty, "including policy uncertainty, fiscal policy uncertainty, and the implications of that for hiring and investment decisions."
Bernanke said a lot of firms are waiting to see whether the fiscal problem will be resolved, further restricting economic and jobs growth.
The Federal Reserve lowered its growth expectations for 2012, to 1.7 to 2 per cent, down from the projected 1.9 to 2.3 per cent in June. But it raised its maximum expectations for growth in 2013 to 3 per cent, up from the previous 2.8 per cent, and boosted projections for 2014 to a possible high of 3.8 per cent.
Unemployment, now at 8.1 per cent, has not dropped below 8 per cent since 2009, and the Fed projected that would continue for the rest of 2012. It does not anticipate a return to more normal levels of under 6.8 per cent until late 2015.
"As the skills of the long-term unemployed atrophy, as their connections to the labour market wither, they may find it increasingly difficult to get good jobs," Bernanke said.
Given the weak economic situation, the Federal Reserve said it would expand its holdings of long-term securities by buying up an additional 40 billion dollars a month of mortgage-backed securities for an indefinite period, bringing to about 85 billion dollars the amount of longer-term securities added to the Fed's balance sheet every month.
The new programme, called QE3, is the third round of quantitative easing by the Federal Reserve since 2008, when the US was dipping into recession.
The bank also projected that it would keep its interest rates at 0.00 to 0.25 per cent through to 2015. Previously, 2014 had been the target date to end the lower interest rates.
The Fed's decision was greeted by Democratic Senator Charles E Schumer, a member of the Senate banking committee, who said: "The Fed is fulfilling its obligation to take action to address unemployment. Now congressional Republicans need to fulfill theirs."
Republican presidential candidate Mitt Romney's campaign charged that a third round of easing showed "that President (Barack) Obama's policies have not worked."
"We should be creating wealth, not printing dollars," said Lanhee Chen, a member of Romney's campaign staff.
The stagnate economy and high unemployment are major factors in the November 6 presidential election. Obama argues that he has brought the country out of recession and saved the country from an even worse economic fate through his stimulus measures and rescue of the automobile industry.
Bernanke dismissed the suggestion that the stimulus decision was politically motivated, saying the Fed's decisions were "based entirely on the state of the economy."
Bernanke indicated that the Fed would keep the expansive measures in place "for a considerable time after the economic recovery strengthens" and the labour market has improved.
In the past, the bank set end times for its QE1 and QE2 programmes, and the open-ended nature of the Fed's decisions on Thursday appeared to be an unprecedented step.
The Fed has kept its benchmark interest rate near zero for nearly four years. Fed decision makers have since extended their monetary policy by announcing large purchases of government bonds - meant to force investors to put more resources into the private sector.
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