US:BEN BERNANKE has outlined extra stimulus options the US Federal Reserve could use if the economy remains weak, acknowledging a possible return to monetary easing.
“The possibility remains that the recent economic weakness may prove more persistent than expected, and that deflationary risks might re-emerge, implying a need for additional policy support,” the Fed chairman told the Financial Services Committee yesterday.
Mr Bernanke’s comments suggest the Fed has returned to a more balanced outlook for policy, with the possibility that its next move will be further easing instead of tightening.
He also gave his most explicit warning yet on the costs of failing to raise the federal debt ceiling, saying a recession on the scale of 2008 would be “certainly conceivable” and would have “a very adverse effect, very quickly on the recovery”.
Jim O’Sullivan, chief economist at MF Global in New York, said: “The words of the chairman today have opened the door a little bit to more easing. The message seems to be that either growth will reaccelerate or the Fed will step in again.”
The Fed chairman’s comments helped trigger a rally in commodity prices. Gold touched a record of $1,587 a troy ounce, while oil and agricultural commodities rose sharply.
Brent crude rose to almost $120 a barrel, well above the level it was trading at when the International Energy Agency announced it would release strategic oil reserves to the market.
“The tone of Bernanke’s statement on top of the actions of European governments are causing commodity markets to back away from some of their most apocalyptic fears,” said Paul Horsnell, Barclays Capital head of commodities research.
Mr Bernanke said if the Fed chose further easing, its options included keeping interest rates close to zero, buying assets in another round of quantitative easing, extending the maturity of the assets on its balance sheet or reducing the 0.25 per cent interest that it pays banks on reserves.
But Mr Bernanke also said “the economy could evolve in a way that would warrant a move toward less-accommodative policy”. He noted that “inflation has picked up so far this year”.
