MercoPress. South Atlantic News Agency

US Federal Reserve prepared to buy more US government bonds

Federal Reserve Chairman Ben Bernanke concerned about unemployment and low inflation

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, Friday.

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

However, some colleagues at the Fed have expressed much more hawkish views, and 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.

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%.

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.

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.

Meanwhile US Congress estimates indicate that the US budget deficit fell to 1.3 trillion US dollars in the year to 30 September, US Congress estimates say. The deficit, which comes after the end of the US financial year, represented 8.9% of GDP and was 122 billion less than the 2009 level. However it is the second highest since the end of World War II.

The data “underscored the administration's commitment” to cutting the massive deficit, the government said.

But Treasury Secretary Timothy Geithner warned that “we still have a long way to go to repair the damage to the economy and address the long-term deficits caused by the crisis.”

“Our fiscal outlook, which remains challenging, has improved over the past year,” said Mr Geithner and the head of the Office of Management and Budget, Jeffrey Zients, in a joint statement.

They said the improvement was due to “careful stewardship” of emergency programs aimed at put the economy on the track to recovery - such as the Troubled Asset Relief Program (Tarp) to bail out banks.

Spending decreased and revenues rose, but analysts said the government was still borrowing 37 cents of every dollar spent.