HomeWorld BusinessBernanke has ‘finger on trigger’ for new bond buys

Bernanke has ‘finger on trigger’ for new bond buys

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CHICAGO/NEW YORK — The Federal Reserve has moved closer to embarking on a new round of its controversial money-pumping after the central bank and its chairman Ben Bernanke highlighted a grim outlook for the United States economy.

Bernanke on Wednesday opened the door a bit wider for the Fed to return to buying securities in the months ahead to buttress a weak recovery and keep inflation from slipping too far below its newly adopted 2% target.

“It sounds like the finger is on the trigger,” said Thomas Simons, a money market economist at Jefferies & Co.

The Fed’s announcement that it was unlikely to raise interest rates until at least late 2014, more than a year beyond its previous guidance, immediately pushed down Treasury bond yields and Bernanke’s comments to the media raised expectations of a further round of so-called quantitative easing, or QE3.

It remains to be seen if the potential political backlash proves too daunting.

The prospect of the Fed pumping yet more money into the US economy was seized upon by Republican hopeful Newt Gingrich to slam President Barack Obama’s record. That highlighted the political pitfalls for the Fed in an election year.

Barring an unexpected pick-up in inflation or the US economy suddenly kicking into a higher gear, Bernanke said it was logical that the Fed should look at ways to do more to help.

“The framework makes very clear that we need to be thinking about ways to provide further stimulus if we don’t get improvement in the pace of recovery and a normalisation of inflation,” he told a quarterly news conference.

“Probably the main take-away from the press conference is the sense conveyed by Bernanke that it would not take much of a disappointment in growth or inflation to get the Fed to start another round of QE,” said Michael Feroli, chief US economist at JP Morgan.

“In fact, from his answers it’s not even clear any disappointment would be necessary to see more QE,” Feroli wrote in a note, adding he was not forecasting another round of asset purchases even if the bar for action was low.

The Fed in late 2008 slashed interest rates to near zero and has since bought $2,3 trillion in long-term securities in an unprecedented drive to spur growth and revive the economy after the worst recession in decades.

Yet the recovery has been slow and the outlook issued by the Fed on Wednesday was bleak.
With core inflation now at 1,7% and Fed officials forecasting unemployment to stay above 8 % this year, many analysts took Bernanke’s comments to mean QE3 is all but inevitable.

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