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Defending Fed, Bernanke signals new economic stimulus

By Don Lee, Tribune Washington Bureau –

WASHINGTON — Federal Reserve Chairman Ben S. Bernanke gave a spirited defense of Fed policies and left little doubt that the central bank was preparing new stimulus for the economy — an action that could roil Republicans and GOP presidential nominee Mitt Romney since it would probably occur in the heat of the general election.

Speaking on the morning after Romney’s nomination address, which focused on the sluggish economy, Bernanke expressed his dissatisfaction with the weak recovery and in particular with what he described as the “painfully slow” improvement in the job market.

But while Romney and other Republican leaders have generally opposed further monetary stimulus for the economy, warning of the risks of inflation and asset bubbles, Bernanke on Friday carefully laid out a case for likely additional action by the central bank.

In a highly anticipated speech delivered at the Fed’s annual retreat in Jackson Hole, Wyo., Bernanke defended the institution’s moves to bolster the economy through purchases of more than $2 trillion of bonds since late 2008. In buying massive amounts of Treasury and other government bonds, the Fed sought to stimulate investments and spending by driving down long-term interest rates.

“We must not lose sight of the daunting economic challenges that confront our nation,” Bernanke said, though he acknowledged that the cost and benefits of more bond-buying are uncertain.

“The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails,” he said, “but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”

Such language, more commonly heard from politicians than central bankers, suggests that Bernanke is looking to build public support ahead of new stimulus moves.

The Fed chief said a “substantial” body of research suggested that the purchases had reduced home loan rates, lifted stock prices and generally eased financial conditions for investors and consumers.

“These effects are economically meaningful,” Bernanke said.

Bernanke’s speech prompted analysts to raise the odds that the Fed would undertake another round of bond purchases, perhaps several hundred billion dollars’ worth, at the conclusion of its two-day meeting Sept. 13.

“I think this is a tipping point,” said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York. “The chairman has made up his mind, and now he’s building support for it.”

Bernanke already appears to have the backing of the vast majority of his colleagues in the policy-setting committee, but inflation hawks inside the Fed as well as outside economists have argued that economic conditions aren’t so bad to warrant more large-scale bond-buying.

The latest data on housing, retail sales and employment indicate that the recovery may be picking up momentum after sputtering in the spring.

“I find it very difficult to see Bernanke spending one of his bullets without a weaker economy or a weaker stock market,” said Stephen Auth, chief investment officer at money manager Federated Investors Inc.

Still, the economy grew at a sluggish pace of less than 2 percent in the first half of this year and is projected to perform just a little better through the end of the year — not strong enough to make a meaningful dent in the unemployment rate, which has been stuck above 8 percent all year. The August jobs report will be released Friday and could be an important factor in the Fed’s decision-making.

Since the recession, Bernanke has frequently faced heat from Congress, mostly Republicans critical of the central bank’s aggressive and unconventional efforts to prop up the economy.

A year ago, top Republican lawmakers sent a letter to Bernanke days before the Fed’s policy meeting, urging him to avoid “further extraordinary intervention” in the economy.

Bernanke also has clashed with vice presidential nominee Paul Ryan, R-Wis., who has accused the Fed chairman of eroding people’s savings and essentially engaging in fiscal policy, the province of Congress.

Romney has stated that, if elected president, he would not reappoint Bernanke. Democratic lawmakers, on the other hand, have goaded Bernanke to do more to support job growth, saying there was little chance that major fiscal stimulus would come out of the deeply divided Congress.

Neither the Obama nor the Romney campaigns issued comments on Bernanke’s speech.

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