Bernanke’s Speech Alludes to Further Fed Easing

Federal Reserve Chairman Ben Bernanke alluded to the possibility of further monetary easing in a speech this afternoon at the Economic Club of Minnesota Luncheon in Minneapolis.

Highlights from “Helicopter Ben’s” speech included:

Notably, the housing sector has been a significant driver of recovery from most recessions in the United States since World War II, but this time–with an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines–the rate of new home construction has remained at less than one-third of its pre-crisis peak

While the weakness of the housing sector and continued financial volatility are two key reasons for the frustratingly slow pace of the recovery, other factors also may restrain growth in coming quarters. For example, state and local governments continue to tighten their belts by cutting spending and reducing payrolls in the face of ongoing budgetary pressures, and federal fiscal stimulus is being withdrawn. 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.

Given this outlook, the Committee decided at its August meeting to provide more specific forward guidance about its expectations for the future path of the federal funds rate. In particular, the statement following the meeting indicated that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low level for at least two more years.

In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. My FOMC colleagues and I will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September and are prepared to employ these tools as appropriate to promote a stronger economic recovery in a context of price stability.

The full text of Bernanke’s speech is available at the Federal Reserve’s website:

http://www.federalreserve.gov/newsevents/speech/bernanke20110908a.htm

Gold showed a muted response to Bernanke’s comments, as it maintained the majority of its gains above $1,850 per ounce.

The broader equity markets extended their losses following the release of the speech, with the Dow Jones Industrial Average (DJIA) down 82.27 points at 11,332.57.