Fed prepared to do more to lift the economy

Federal Reserve Chairman Ben Bernanke walks outside a meeting room during a break in the Jackson Hole Economic Symposium on Aug. 31, 2012, at Grand Teton National Park near Jackson Hole, Wyo.
AP Photo/Ted S. Warren

(MoneyWatch) COMMENTARY Ben Bernanke is offering the strongest indications yet that the Federal Reserve is prepared to do more to spur economic growth.

Reviewing the central bank's efforts to revive the U.S. economy in a speech Friday at the Fed's annual conference in Jackson Hole, Wyoming, Bernanke noted that "the economic situation is obviously far from satisfactory." Unemployment remains too high, and other labor market indicators, such as the employment-to-population ratio point to a stagnant labor market.

Bernanke also made it clear that further action to help the economy depends on the Fed's assessment of the costs and benefits of additional policy action. On the benefits, Bernanke said that "it appears reasonable to conclude that nontraditional policy tools have been and can continue to be effective."

Yet the Fed is on new ground -- there is little history to rely upon in assessing the policies -- and there is considerable uncertainty about how much the policies can benefit the economy.

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The benefits of economic further stimulus must be weighed against the costs, Bernanke said. Among these possible costs, he added, are inflation, financial instability, market distortions from large asset purchases, and losses on the assets the Fed holds in its balance sheet. However, inflation is what the Fed is most concerned about, and as Bernanke noted there is no evidence that the Fed's policies to date have significantly boosted inflation. The Fed  also believes it has the tools to stop inflation if it becomes a threat.

But while it appears that Bernanke favors doing more to spark growth, the Fed's monetary policy committee is fairly evenly split on whether to take action. What, if any, measures the Fed takes will hinge on the economic data it sees before the bank's next policy meeting in September. The inflation data is unlikely to change much -- it's been running a bit below the Fed's 2 percent target and expectations have been stable.

That means the job numbers will be critical. If employment continues to stagnate or if the economy loses ground, then further action by the Fed is fairly certain. But if there is progress on employment and if other economic indicators also point to an improving economy, the swing votes at the Fed will not support more accommodative policy.

The Fed has been "watching and waiting" in hopes that the economy improves so that it can avoid the hard decision to try to do more to promote economic growth. But so far, despite the Fed's tendency to see "green shoots," the economy has not been recovering at anything near a satisfactory rate. With so little time until the next Fed meeting, and with Bernanke's comments today, that leads to a strong expectation of further monetary easing. But it is not a sure bet.