Federal Reserve Chairman Ben S. Bernanke, citing the threat of prolonged high unemployment and an economy potentially falling into a dangerous deflationary spiral, laid out a case Friday for the central bank to buy more U.S. government bonds in a bid to bolster growth.
But in a much-anticipated speech in Boston, Bernanke also made it clear that there were long-term risks — for the economy and the Fed's credibility — in cranking up the electronic printing press and pumping hundreds of billions of dollars into the financial system.
His remarks seemed to plant seeds of suspicion among some economists that the purchases would not be as big as many had hoped, raising the question of just how much another round of Treasury purchases will help the economy.
"We have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public," Bernanke said at a conference sponsored by the Federal Reserve Bank of Boston.
As Bernanke spoke, the government released statistics showing that the so-called core inflation rate, which excludes volatile energy and food prices, was unchanged in September and is now running at an annual rate of 0.8% — well below the Fed's informal desired target of 1.5% to 2%.
Separately, there was better-than-expected news on last month's retail sales activity as total sales rose 0.6% from August, boosted by higher auto sales.
Bernanke said that the "preconditions for a pickup in growth next year remain in place," citing improvements in household finances, solid business investments and a recovery in state and local tax revenues.
But the Fed chief also pointed to the troubled housing market and the slow rate of private-sector job growth, which damps consumer spending and poses risks for the sustainable growth of the whole economy. And while economic growth is expected to be stronger next year, he said, it isn't likely to expand fast enough to bring down the unemployment rate quickly.
Analysts widely expect the Fed to announce a plan to buy Treasury bonds, a program known as quantitative easing, at the end of its next two-day policymakers' meeting, ending Nov. 3.
Though Bernanke didn't say how much Treasury debt the Fed would buy or over how long a period, economists expect at least $500 billion worth. The Fed previously bought $1.75 trillion worth of Treasury bonds and other securities that helped lift the economy out of recession.
The hope is that the new purchases would juice up the economy by further lowering long-term interest rates, which should allow more homeowners to refinance their mortgages and more businesses to borrow at cheaper rates. And indirectly, the Fed's purchases could weaken the dollar, giving a boost to U.S. exporters whose goods would be cheaper for foreign consumers.
But some analysts doubt that the central bank's action next month would deliver a big punch. Expectations of the probable Fed action already have boosted stock prices, lowered rates and depressed the dollar, and it's unclear how much more they'll react when the Fed finally moves.
Economists at Moody's Analytics estimated that anticipation of the Fed's quantitative easing had reduced 10-year Treasury yields by 0.3 of a percentage point, lowered the value of the dollar by about 5% and lifted stock prices by a similar amount.
Overall, Moody's said its models suggested that the Fed action may boost real gross domestic product growth by about 0.15 of a percentage point next year, which translates into a quarter-million additional jobs and a reduction of 0.2 of a percentage point in the unemployment rate, now at 9.6%.
"It's better than nothing, but it's not going to make a huge difference," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
Michael Fratantoni, vice president of research at the Mortgage Bankers Assn., said mortgage rates hit historical lows last week, falling to 4.2% for a 30-year fixed-rate mortgage. He expects average rates to rise from now, climbing to about 5% in the middle of next year. He noted that after Bernanke's speech the 10-year Treasury yields shot up 0.15 of a percentage point, reflecting concerns about the magnitude of the Fed's action.
Even if mortgage rates held at 4.2%, it wouldn't help homeowners like Kenneth Bernardo of Fort Collins, Colo.
"So far it's not made sense," said the 58-year-old mental health therapist, whose property value dropped during the recession. "I can refinance and get a lower rate, but my monthly payment would go up." That's because he pays only the interest on his current loan, at least for now, but would have to pay both interest and part of the principal on a refi.
Bernardo, who works two jobs, one full-time and another part-time, is glad that stock prices have risen lately, but he isn't about to go on a shopping spree either.