Bernanke and the Fed, "Prepared to Do More"

By: From CNN Money
By: From CNN Money


NEW YORK (From CNNMoney) -- Could more stimulus be on the way for the ailing American economy?

Federal Reserve Chairman Ben Bernanke certainly left the option on the table Wednesday, making perfectly clear that he stands ready to do more should the U.S. economy take a turn for the worse.

"In case things get worse, we are prepared to protect the U.S. economy and financial system," Bernanke told reporters at a press conference.

It was a point he reiterated several times and a sign that many outsiders took to mean the Fed has left the door open on a third round of asset purchases known as quantitative easing, or QE.

"Mr. Bernanke's press conference surely left few doubts that the Fed will take more aggressive action and renew QE if the economy fails to perform as they expect," Ian Shepherdson, chief U.S. economist for High Frequency Economics, said in a note to clients.

Meanwhile, University of Pennsylvania Economist Justin Wolfers tweeted: "I read the Fed as saying: One more bad jobs report, and we'll do more."

Indeed, the job market remains one of Bernanke's top concerns. The unemployment rate is still uncomfortably high at 8.2%, and the government's latest jobs report showed employers added only 69,000 jobs in May-- the weakest hiring in a year.

Bernanke also warned of Europe's financial crisis and uncertainty surrounding the "fiscal cliff" putting a dent in U.S. growth.

Amid those concerns, the Fed extended its existing policy known as Operation Twist, and lowered its expectations for the job market and the broader U.S. economy this year.

The central bank predicts the unemployment rate will end the year between 8% and 8.2%. Just two months ago, it was more optimistic, predicting the jobless rate could fall as low as 7.8%.

"Growth in employment has slowed in recent months, and the unemployment rate remains elevated," the Fed said in an official statement.

The Fed also sees broader weakness ahead, predicting the economy will grow between 1.9% and 2.4% this year. When the Fed met back in April, it had forecasted that the economy would grow as much as 2.9%. That weaker outlook prompted the Fed to extend Operation Twist by $267 billion.

The program swaps short-term bonds for ones with longer durations, thereby pushing interest rates lower on mortgages and business loans. The hope is that cheaper credit will reach consumers and business, who will then boost the economy by spending more.

The effect on Main Street has been questionable though. Mortgage rates are at record lows, but even so, new home sales have been choppy and banks are still unwilling to lend to anyone with less-than-perfect credit. Small business owners are also struggling to get loans.


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