The Federal Reserve is ready to take new action to speed up the economy, Fed chief Ben Bernanke said Thursday, but warned that government budget-cutting could hold back growth.
“The Federal Reserve has a range of tools that could be used to provide additional monetary stimulus,” Bernanke said in a speech in Minneapolis.
The members of the Fed’s policy board, which meets on September 21-22, “are prepared to employ these tools as appropriate to promote a stronger economic recovery in a context of price stability,” he said.
Bernanke gave no indication of just what the central bank could do to stimulate the sluggish economy. Many analysts say that it could at least adjust its purchases of government bonds to push down long-term interest rates rather than focus on short term rates as in the past two years.
Bernanke also said that after a first-half pace of less than one percent the economy is poised to pick up speed in the second half, with little danger of inflation.
But he added that growth remains under threat, particularly from spending cuts by government authorities at all levels.
“There is ample room for debate about the appropriate size and role for the government in the longer term, but — in the absence of adequate demand from the private sector — a substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring.”
Bernanke did not repeat his caveat of August 26, when he told a central bank symposium in Jackson Hole, Wyoming that “most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.”
But he did stress that government policy to reverse the weakness in the housing sector, and to generate jobs, was crucial for charging up growth.
“While prompt and decisive action to put the federal government’s finances on a sustainable trajectory is urgently needed, fiscal policymakers should not, as a consequence, disregard the fragility of the economic recovery.”
Bernanke spoke just hours before President Barack Obama is slated to announce a $300 billion job creation effort in a major speech before Congress.
With some 14 million Americans officially unemployed, and millions more having dropped out of the work force, Obama aims to reset the government agenda after a bruising battle with Republicans who have forced sweeping spending cuts on the White House.