Bernanke signals ease, but details lacking

BOSTON Fri Oct 15, 2010 12:22pm EDT

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BOSTON (Reuters) - Federal Reserve Chairman Ben Bernanke signaled a further easing in U.S. monetary policy on Friday but offered few details on how the central bank might go about giving the economy more support.

Bernanke warned of the risk of a prolonged period of high unemployment undercutting the recovery and said a broad slowing in inflation had raised deflation risks.

Here is a quick look at some high points of Bernanke's speech.

* While not as direct as New York Federal Reserve Bank President William Dudley and Chicago Fed President Charles Evans, who have been in making the case for a further easing of policy, Bernanke clearly shows sympathy for their arguments.

"Given the (policy-making) committee's objectives, there would appear -- all else being equal -- to be a case for further action."

* He stops short of directly advocating more Treasury purchases, however, or an explicit inflation target, clearly not wanting to preempt the Federal Open Market Committee's November policy-setting meeting. Still, his speech suggests he would be open to both.

"Further policy accommodation is certainly possible even with the overnight interest rate at zero, but nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used."

* Bernanke said a disadvantage of further Treasury purchases is that the Fed has little experience judging the economic effect of the tool, making it difficult to determine the pace and quantity of purchases that would be appropriate and communicating that to the public.

"These factors have dictated that the FOMC proceed with some caution in deciding whether to engage in further purchases of longer-term securities," he said. But he said the first round of purchases appears to have worked to bring down longer-term interest rates.

He said one risk was the possibility that additional purchases could erode confidence in the Fed's ability to exit from its easy monetary policy but added he was confident of the central bank could exit the strategy smoothly.

* Bernanke makes the case for more clarity about the Fed's goals and strategies, which he says could help anchor the public's longer-term inflation expectations.

He differentiates between the Fed's employment and its price stability mandate, potentially paving the way for a more explicit inflation target.

"The sustainable rate of unemployment typically evolves over time as its fundamental determinants change, whereas keeping inflation expectations firmly anchored generally implies that the inflation objective should remain constant unless there are compelling technical reasons for changing it, such as changes in the methods used to measure inflation," he said.

* Bernanke says the Federal Open Market Committee's statements could be modified "in some way" to show the Fed expects to keep rates low for longer than markets expect, if needed, he said.

"Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations."

Since December 2008, the FOMC has said exceptionally low interest rates are likely to be warranted for an "extended period."

* Opponents to more easing have argued that further Treasury purchases will have little impact, as structural unemployment is best addressed by fiscal policies. Bernanke said he sees little evidence suggesting that the pace of structural change is greater than in other recessions.

(Editing by Padraic Cassidy)

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