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Fed ready to step in with new stimulus

Central bank will act if lull persists, Bernanke says

“We have to keep all options on the table,’’ Federal Reserve chairman Ben Bernanke told the House Financial Services Committee yesterday. He warned that a failure to raise the nation’s borrowing limit by Aug. 2 could trigger a major financial crisis. “We have to keep all options on the table,’’ Federal Reserve chairman Ben Bernanke told the House Financial Services Committee yesterday. He warned that a failure to raise the nation’s borrowing limit by Aug. 2 could trigger a major financial crisis. (Carolyn Kaster/Associated Press)
By Martin Crutsinger
Associated Press / July 14, 2011

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WASHINGTON - Federal Reserve chairman Ben Bernanke said yesterday that the central bank is prepared to provide additional stimulus if the economic lull persists.

Delivering his twice-a-year economic report to Congress, Bernanke laid out three options the central bank would consider. One possibility, he said, was another round of Treasury bond buying. That would make the third such effort since 2009.

The Fed chief’s reassurances underscored the fragile state of the economy more than two years after economists said the recession had ended. Unemployment has risen for three straight months, and a debt crisis in Greece and other European countries threatens to weaken the global economy.

Bernanke warned US lawmakers that their failure to raise the nation’s borrowing limit by Aug. 2 could trigger a major financial crisis. He said that if government defaults on its debt, it would throw “shock waves through the entire financial system.’’

Bernanke said more stimulus would only be necessary if economic conditions worsened and deflation re-emerged as a threat. Deflation is a destabilizing period of falling prices.

He also said the Fed was nimble enough to respond if the opposite happened. He said the Fed was ready to raise interest rates that have been held at record lows for nearly three years, should the central bank fear a greater risk of inflation.

“We have to keep all options on the table,’’ Bernanke told the House Financial Services Committee. “If we get to the point where the recovery is faltering’’ and inflation is dropping toward zero, then the central bank would consider the additional stimulus options, he said.

In addition to purchasing Treasury bonds, Bernanke said the Fed could help the economy by:

■ Cutting the interest paid to banks on the reserves they hold as a way to encourage them to lend more.

■Communicating in more explicit terms how long it planned to keep rates at record-low levels.

That would give investors confidence about the Fed’s efforts to continue supporting the economy.

The Fed has said that temporary factors, such as high gas prices and supply chain disruptions caused by the Japan crisis, are partly to blame for the current sluggish period.

Bernanke told Congress that the Fed believes those impediments should ease in the second half of the year. But if that forecast proves wrong, he said, the Fed is prepared to do more.