16 Oct 2010

Fed may move to stimulate US economy - Bernanke

4:16 pm on 16 October 2010

The head of the United States Federal Reserve has given strong hints that the bank may take further action to stimulate the US economy.

In a speech in Boston, Fed chairman Ben Bernanke said there would appear - all else being equal - to be a case for further action.

At its next meeting on 3 November the Fed is expected to back a move to buy US government bonds in order to lower borrowing costs.

Mr Bernanke was careful, however, not to pre-empt the decision of the committee that sets the rate.

The BBC reports he did not give any indication of the size or timing of any new quantitative easing, but did confirm it was likely to target US government bonds.

Previously the Fed has bought billions of dollars of US mortgage debts.

Mr Bernanke warned that prolonged high employment would put recovery at risk, while the inflation rate has been trending downwards.

He played down a view expressed by some of his colleagues that high unemployment was "structural" in nature - for example, because US workers do not have relevant skills for available jobs - and therefore something the Fed could not help.

Instead he blamed the continuing high level of joblessness on the sharp contraction in demand in the economy - something that further monetary easing should ameliorate.

Inflation too late

Mr Bernanke also raised concern that the inflation rate was falling below what he considered consistent with the Fed's mandate.

He said some measures suggested the underlying inflation rate - which ignores short-term price volatility - may have fallen as low as 0.5% in recent months.

Most analysts believe the Fed targets a rate of 2%.

The Fed has a dual mandate to maintain price stability and full employment.