Banking

The process of recovery and repair in the U.S. economy is far from complete, said Federal Reserve Chairman Ben Bernanke at the central bank's annual meeting at Jackson Hole in August. While the Federal Reserve has taken numerous steps to support the economic recovery that is underway, there are additional policy tools it could use if the outlook were to deteriorate.

Economic recovery weaker than expected
Recent data show that consumer spending, output, and employment have undergone less robust growth than expected. Much of the slowdown can be attributed to the household sector, as cautious consumers reduce their debt and build savings, Bernanke noted. Recovery in the labor market has also been disappointing, which is of primary concern to Fed policymakers, he said.

Faced with recent evidence that the economic recovery had slowed, participants on the Federal Open Market Committee (FOMC) agreed in early August to maintain the size of the Fed's securities portfolio. Allowing the balance sheet to shrink at a faster than expected pace "at a time when the outlook had weakened somewhat was inconsistent with the Committee's intention to provide the monetary accommodation necessary to support the recovery," explained Bernanke.

Fed has more policy tools at the ready
Further, the FOMC will continue to monitor economic conditions and stands ready "to provide additional monetary accommodation through unconventional measures," if necessary, he said. In particular, Bernanke outlined three ways that the Fed could provide additional stimulus:

• buying additional longer-term securities
• modifying the FOMC's communications
• reducing the interest rate paid on excess reserves

Each option has benefits and drawbacks, Bernanke noted, and the FOMC has yet to agree on specific criteria for when they would be used. However, the FOMC "will certainly use its tools as needed to maintain price stability—avoiding excessive inflation or further disinflation—and to promote the continuation of the economic recovery," Bernanke said.

September 21, 2010