More Fed purchases 'certainly possible'

Federal Reserve Chairman Ben S Bernanke said the economy is barely expanding at a sustainable pace and that it’s possible the Fed may expand bond purchases beyond the $600 billion announced last month to spur growth.

“We’re not very far from the level where the economy is not self-sustaining,” Bernanke said in an interview broadcast yesterday by CBS Corp’s 60 Minutes programme. “It’s very close to the border. It takes about 2.5 per cent growth just to keep unemployment stable and that’s about what we’re getting.”

Bernanke, in a rare appearance on a nationally broadcast news programme, defended the Fed’s efforts to prop up a recovery so weak that only 39,000 jobs were created in November. The unemployment rate last month rose to 9.8 per cent, the highest level since April, the Labor Department said on December 3, three days after the Bernanke interview was taped. Republican lawmakers have said the Fed’s policy of “quantitative easing” may do little to help unemployment and may fuel inflation.

“At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate” of about 5 per cent to 6 per cent, Bernanke said. The purchase of more bonds than planned is “certainly possible”, said Bernanke. “It depends on the efficacy of the programme” and the outlook for inflation and the economy.

Bernanke said a return to a recession “doesn’t seem likely” because sectors of the economy such as housing can’t become much more depressed. Still, a long period of high unemployment could damage confidence and is “the primary source of risk that we might have another slowdown in the economy”.

Treasuries, dollar
Treasuries rose, pushing yields down from a four-month high after the remarks were published, with yields on 10-year notes falling 7 basis points to 2.94 per cent at 9.11 am in London, according to BGCantor Market Data. The dollar advanced 0.8 per cent to $1.3301 per euro.

The Fed’s decision to undertake new bond purchases sparked a political backlash in Washington. The programme, known as quantitative easing, has been criticised by officials in countries including China and Germany. Policy makers in emerging markets expressed concern it would drive down the dollar and cause a surge of capital abroad that created asset-price bubbles.

“Bernanke is defending his decisions to a mass American audience” on the CBS programme, said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp. “He is not giving way to criticism, whether it is domestic or international,” he said, adding that “it’s another reminder that the dollar is a side effect of quantitative easing and not a top factor in the Fed’s view.”