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US Federal Reserve Chairman Ben Bernanke said on Friday that high unemployment and low inflation point to a need for a further easing of US monetary policy, but he offered no details on the central bank's next step.
"There would appear -- all else being equal -- to be a case for further action," Bernanke said at a conference sponsored by the Boston Federal Reserve Bank.
He said a prolonged period of high unemployment could pose a risk to the recovery's sustainability and said the low level of inflation meant the risk of a dangerous downward slide in prices was greater than desirable.
However, he said policymakers were still weighing how aggressive they should be.
The US dollar fell against the euro and yen on Bernanke's remarks, and stock index futures turned positive. Prices for US government debt rose, but only briefly.
Since the US recovery began showing signs of fading over the summer, the Fed has steadily built up expectations that it would renew its large-scale asset buying to support growth.
Most economists expect around USD 500 billion in easing before the end of the year, a Reuters poll showed.
Bernanke said that while the central bank, which pushed overnight interest rates to zero in December 2008, has the tools to ease financial conditions further, it still needed to proceed cautiously.
"Nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used," he said,
The central bank's previous program of bond buying succeeded in lowering borrowing costs, but adding to the Fed's already enlarged balance sheet has risks and it is hard to calibrate the scope of any further purchases, the Fed chief said.
The US dollar has hit its lowest level of the year against a broad basket of currencies on expectations of further Fed easing, drawing the ire of emerging economies contending with a flood of capital as investors chase higher yields.
Many countries, worried about the impact on their exports, have taken steps to temper the rise in their currencies, sparking fears of a series of competing devaluations.
Recession over but unemployment lingers
Even though the deep US recession ended in June 2009, unemployment still hovers at a lofty 9.6%, and core inflation, as measured by the Fed's favorite gauge, has slipped to 1.4%.
Bernanke noted that that measure had risen at just a 1.1% annual rate so far this year. Fed officials shoot to keep inflation in a range of 1.7-2%.
A report on Friday showed the more popular Consumer Price Index rose just 0.1% in September, while the core CPI, which strips out food and energy costs, was flat for a second straight month. Over the past 12 months, the core CPI has risen just 0.8%.
When the Fed's policy-setting panel convened on September 21, many felt progress was unsatisfactory on both the jobs and inflation fronts. Several officials felt a further easing of policy would be needed soon absent a sudden improvement in the economy.
Bernanke made clear that communications policy could be a powerful tool in helping to ease financial conditions further, and said the Fed could use its post-meeting statements to indicate the central bank intends to keep interest rates low for longer than financial markets expect.
Minutes of the Fed's September 21 meeting released on Tuesday showed officials debated setting an explicit target for inflation, or even announcing they will allow inflation to temporarily run above targeted levels for a time to make up for lost ground if inflation fell short of their objective.
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