Bernanke: Fed Wrestles with Size of Aid Program

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WASHINGTON -- The Federal Reserve is prepared to take further steps to rejuvenate the economy by buying Treasury bonds but is wrestling with how big the program should be, Chairman Ben Bernanke said Friday.

Bernanke said the Fed must weigh the risks of a Treasury-buying program and determine how the debt purchases would be paced. The Fed's bond purchases would be intended to lower long-term interest rates to stimulate buying and spending and help lower unemployment.

Fed policymakers are widely expected to announce a Treasury buying program at their next meeting Nov. 2-3.

"There would appear - all else being equal - to be a case for further action," Bernanke said.

Bernanke also indicated that policymakers are trying to craft a plan to strengthen the economy and lift inflation from super-low levels. He made his remarks in a speech delivered to a Fed conference in Boston.

The economy is growing at a pace "less vigorous than we would like," Bernanke acknowledged.

Unemployment, now at 9.6 percent, has been stuck near double digits for more than a year. Bernanke indicated that the Fed is concerned that economic growth is likely to remain lackluster and that unemployment will decline only slowly next year. High unemployment is likely to keep consumers cautious in their spending.

Because the economy is weak, "the risk of deflation is higher than desirable," Bernanke said.

For now, the Fed is more interested in seeing prices rise- rather than fall.

As Bernanke was speaking, the government issued a report that pointed to why a new Treasury-buying program may be necessary to ward off deflation. Consumer prices excluding the volatile categories of food and energy were flat or a second straight month.

A prolonged drop in prices for goods, for wages and in the values of homes and stocks is dangerous for the economy and Americans' pocketbooks. It makes paying on debt much harder, causing more people to fall into foreclosures, default on credit card bills and companies to slide into bankruptcy.

Bernanke's comments come as the Fed is weighing steps to try to raise people's expectations of where they think inflation is heading in the months ahead.

If the Fed were to communicate that it will tolerate a higher-than-normal rate of inflation, that could make companies feel more inclined to nudge up their prices. Shoppers, thinking prices would be rising even further in the future, would be more inclined to make purchases sooner. That would lift inflation from worrisome low levels.

Such a move would push "real" or inflation-adjusted interest rates, down, which could spur more spending. Fed officials at the September meeting noted that it has ways to try to influence people's expectations of inflation. One way was to include information in the minutes of the Fed meetings to try to shape people's expectations about inflation.

Copyright 2010 by The Associated Press.  All Rights Reserved.

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Associated Press

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