Fed to provide new stimulus if condition warrants: Bernanke

08:35, July 14, 2011      

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Chairman of the U.S. Federal Reserve Ben Bernanke testifies before the US House Financial Services Committee on Fed's Semiannual Monetary Policy Report to the Congress, on Capitol Hill in Washington D.C., capital of the United States, July 13, 2011. The U.S. central bank is poised to provide additional stimulus efforts if the U.S. economy remains sluggish, Bernanke said Wednesday. (Xinhua/Zhang Jun)

The U.S. central bank is poised to provide additional stimulus efforts if the U.S. economy remains sluggish, Federal Reserve Chairman Ben Bernanke said Wednesday.

The U.S. economy has continued to recover, but the pace of the expansion so far this year has been modest, Bernanke said in his twice-a-year economic report to Congress.

"The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support," his report said.

Bernanke maintained that temporary factors, such as high food and gas prices, have slowed the economy. He said those factors should ease in the second half of the year and growth should pick up. But if that forecast proves wrong, he said the Fed is prepared to do more.

Even with the federal funds rate close to zero, the central bank still has a number of tools to ease financial conditions, Bernanke told lawmakers during his first day of the two-day Capitol Hill testimony.

"One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings," he said.

Stocks jumped after Bernanke signaled the Fed's willingness to take more steps to boost the sluggish economy.

The Fed has kept its key interest rate at a record low near zero since December 2008. Most private economists believe the Fed will not start raising interest rates until next summer. And some say the Fed won't increase rates until 2013, based on the slumping economy.

Bernanke was testifying after the government released a dismal jobs report last week.

Bernanke defended the effectiveness of Fed's second round of quantitative easing (QE), dubbed QE2, saying that the program had the intended effects of "reducing the risk of deflation and shoring up economic activity."

"This was a significant achievement, as we know from the Japanese experience that protracted deflation can be quite costly in terms of weaker economic growth," he said.

When the U.S. economy stalled last summer, the Fed in November rolled out QE2 to purchase 600-billion-dollar long-term Treasury securities, to keep medium- and long-term interest rates low and facilitate business and household borrowing. Fed has spent more than 2 trillion dollars to boost the economy since the financial crisis broke out in the fall of 2008.

Bernanke held that the world's largest economy was confronted with several strong headwinds including slow growth in consumer spending, the depressed housing sector,limited access to credit for some households and small businesses, as well as fiscal tightening at all government levels.

He also cautioned that the United States should improve its long-term fiscal sustainability and policymakers should take timely steps to address the challenge, adding that the nation cannot continue on the unsustainable fiscal path.

He warned that a U.S. debt default would spark a major crisis and has global economic repercussions.

Source: Xinhua

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