Fed�s Bernanke signals new round of quantitative easing

BBC News (Link) (October 30, 2010)

US Federal Reserve Chairman Ben Bernanke has opened the way to a new round of quantitative easing.

�There would appear, all else being equal, to be a case for further action,� he said, in a speech to the Boston regional federal reserve.

The US central bank is expected to back a move to buy up US government bonds in order to lower borrowing costs at its next meeting on 3 November.

Mr. Bernanke said unemployment and low inflation lay behind his view.

However, some colleagues at the Fed have expressed much more hawkish views, and Mr. Bernanke was careful not to pre-empt the decision of the rate-setting committee due next month.

In his speech, he did not give any indication of the size or timing of any new quantitative easing, but did confirm it was likely to target US government bonds.

Previously the Fed has bought up billions of dollars of US mortgage debts.

Dual mandate

Mr Bernanke warned that prolonged high employment would put recovery at risk, while the inflation rate has been trending downwards.

The Fed has a dual mandate to maintain price stability and full employment.

He played down a view expressed by some of his colleagues that high unemployment was �structural� in nature - for example because US workers do not have relevant skills for available jobs - and therefore something the Fed could not help.

Instead he blamed the continuing high level of joblessness on the sharp contraction in demand in the economy - something that further monetary easing should ameliorate.

He also raised concern that the inflation rate was falling below what he considered consistent with the Fed�s mandate.

He said some measures suggested the underlying inflation rate - which ignores short-term price volatility - may have fallen as low as 0.5% in recent months.

Most analysts believe the Fed targets a rate of 2%.

Weak dollar

The speech contained no major surprises for markets, as it largely repeated views expressed in the minutes from the Fed�s latest policy meeting.

The dollar dropped about 0.3% against most major currencies following the speech�s release, before bouncing back strongly when stronger-than-expected retail sales were announced 15 minutes later.

Against the yen, it briefly hit a new 15-year low of 80.89, only 1.5% above its all-time low of 79.7 yen.

Quantitative easing is partly aimed at weakening the dollar�s value, by increasing the amount of dollar cash in circulation.

A weaker dollar helps the Fed achieve its dual mandate, by making US exporters more competitive - stimulating job creation - and by increasing inflation through higher import prices.

The dollar has lost 15% of its value against the euro since early June, on growing speculation that a slowdown in the US economy in the second half of the year would force the Fed to ease monetary conditions further. �