Bernanke: Fed's ability to support U.S. economy is limited

WASHINGTON Wed Dec 12, 2012 6:15pm EST

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WASHINGTON Dec 12 (Reuters) - There are limits to how much aid the Federal Reserve can provide to the U.S. economy, Fed Chairman Ben Bernanke warned on Wednesday as he urged politicians to tackle a year-end fiscal cliff that could derail the country's gradual recovery.

"We have innovated quite a bit in the last few years, and (it) is always possible we could find new ways to provide support for the economy," he told a news conference after the Fed announced another round of bond buying to spur growth.

"But it is certainly true ... that with interest rates near zero and the (Fed's) balance sheet already large, that the ability to provide additional accommodation is not unlimited."

The U.S. central bank announced it would keep buying $85 billion of Treasury and mortgage-backed bonds a month until it saw a substantial improvement in the outlook for the labor market. Its balance sheet would increase to almost $4 trillion by the end of next year if it kept up that pace of purchases.

Bernanke said it was "critical that fiscal policymakers come together" to deliver a package of spending cuts and tax revenue increases that would help lower the deficit without stalling the recovery.

He acknowledged that the Fed would try to do what it could to offset the negative consequences for the economy if it did go over the fiscal cliff, and would "perhaps increase a bit" the support that it was able to provide businesses and households.

"But I just want to again be clear, that we cannot offset the full impact of the fiscal cliff. It is just too big, given the tools that we have available, and the limitations on our policy toolkit at this point," he said.

The Fed chopped overnight interest rates to near zero nearly four years ago. The U.S. central bank has already bought about $2.4 trillion in securities to drive other borrowing costs lower.

NO MAGIC WAND

Critics of the central bank's aggressive actions to engineer a quicker reduction in the level of U.S. unemployment charge that it risks stoking both future inflation and credit bubbles by massively expanding its balance sheet.

Bernanke made clear that he took those threats seriously, while emphasizing inflation expectations remained well-anchored.

Underlining his frustration with the sluggish pace of growth and the country's still high level of unemployment, which stood at 7.7 percent last month, Bernanke also spelled out that the Fed had no magic bullet to deliver a quicker improvement in U.S. hiring.

"If we could wave a magic wand and get unemployment down to 5 percent tomorrow, obviously, we would do that," he said.

"But there are constraints in terms of the dynamics of the economy, in terms of the power of these tools, and in terms of the fact that we do need to take into account the possibility of other costs and risks that might be associated with a large expansion of our balance sheet."

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Comments (3)
Bretfox wrote:
The actions of the FED during the last four years have not been in the best interest of the American economy. If someone had he guts to expose the people who really run the FED Americans would revolt. Ben Bernanke does not run the FED. He is a puppet.

Dec 12, 2012 6:38pm EST  --  Report as abuse
MassResident wrote:
The best thing that could be done to help the economy is to fire this man and shut down the Fed’s printing presses. It would also help to stop lying about the inflation rate. Anyone who believes the official figures must not buy food. The economy won’t recover as long as insiders control “The Best Government Money Can Buy” and steer cash into their own pockets with government mandates, subsidies, regulations, etc. Government supported monopolies don’t bring prosperity.

Dec 12, 2012 7:01pm EST  --  Report as abuse
beancube2101 wrote:
He is pretty much telling us that he had given away all our money to hijacker investment bankers already and those hijackers have all their rights to just sit on those QE money on top of fooling around overseas trying to blow up real estates or commodity markets and selling wars they really have passion about CIA because we are the one who are going to pay for it anyway. He cannot say it but are telling us, all Americans, that we must organize beyond Congress and Senate to take back the FED or completely dismantle it so we can break up those insiders connecting with political parties to prevent them from indirectly setting laws and hijacking new resource capitals needed for our manufacturing recovery and economy. Governments can’t do this unless we push it hard enough.

Dec 12, 2012 7:39pm EST  --  Report as abuse
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