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Fed ready to help restore growth: Bernanke

Fed chairman Ben Bernanke

Alex Wong/Getty Images

U.S. Federal Reserve chairman Ben Bernanke said on Thursday the U.S. central bank would spare no effort to boost disappointingly weak growth and reduce unemployment, while playing down concerns about inflation.

While the Fed chairman did little to change expectations of a further easing of monetary policy when officials meet Sept. 20-21, he offered no details of steps the Fed might take.

"The Federal Reserve will do all it can to help restore high rates of growth and employment in a context of price stability," Mr. Bernanke told the Economic Club of Minnesota.

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In what could be taken as a bid to quell concerns among some of his colleagues that further easing could spark inflation, Mr. Bernanke said a rise in consumer prices this year would likely be transitory.

"We see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy," he said.

U.S. stocks fell as investors registered disappointment that Mr. Bernanke did not lay out a plan of action for the central bank's policy-setting Federal Open Market Committee. The dollar extended gains against the euro, while Treasury debt prices rose.

"Although the speech was lacking in any specifics about potential policy options, we see the relatively downbeat nature of the chairman's comments on the growth outlook as confirming our view that the FOMC is inclined to take further accommodative steps at its September meeting," said Michael Gapen, an economist at Barclays Capital in New York.

A widening debt crisis in Europe and collapse in consumer and business confidence in the United States has raised concern the U.S. and global economies could slide back into recession.

So stark is the recent deterioration in the global economic recovery that the political debate in Washington has veered in only six weeks from a preoccupation with how to cut U.S. debt to a renewed urgency on lowering unemployment.

President Barack Obama was scheduled to lay out a jobs package worth more than $300-billion (U.S.) later on Thursday, and job creation was a key theme for Republican presidential hopefuls at a debate on Wednesday.

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Other than offering a bit more detail on the outlook for inflation and emphasizing that sluggish growth is not enough to satisfy the Fed, Mr. Bernanke offered few fresh insights into thinking at the central bank on measures to aid the recovery.

He largely reiterated remarks he made two weeks ago, repeating that the Fed has a range of tools to provide additional stimulus and is prepared to use them.

The Fed cut benchmark rates to near zero almost three years ago to pull the economy out of a sharp recession. It then bought $2.3-trillion worth of longer-term securities in two instalments ending in June to boost growth.

But with confidence crumbling, the Fed on Aug. 9 eased monetary policy further by expanding on an earlier promise to hold rates at rock-bottom levels for an extended period, saying it expected to keep them low at least through mid-2013, a decision that drew three dissents on the FOMC.

Mr. Bernanke may have decided to keep his cards close to his vest on Thursday in order not to pre-empt the debate later this month among members of the Fed's fractious policy panel.

"With the FOMC clearly split, Bernanke probably didn't want to antagonize the hawks who voted against the decision at August's meeting," said Paul Ashworth, chief U.S. economist for Capital Economics.

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Many analysts expect the Fed's next move to be a shift in its $2.8-trillion balance sheet to holdings of more longer-term securities. The point of such a move would be to "twist" down interest rates for longer maturities, potentially spurring mortgage refinancing and other activity that depends on longer-term interest rates.

The Fed is considering selling shorter-term securities and buying longer-term bonds, as well as simply replacing maturing securities with longer-dated issues.

One Fed official, Chicago Federal Reserve Bank president Charles Evans, has called for pledging to maintain ultra-loose monetary policy until unemployment comes down to a more acceptable – and specified – level.

A more modest step under consideration would be for the central bank to encourage lending by lowering the rate it pays banks for excess reserves they hold at the Fed.

Mr. Bernanke said unusually weak household spending and persistent financial strains spurred by worry over Europe's sovereign debt crisis and the loss of Washington's top-tier credit rating continue to hold back the recovery.

He also repeated a warning that overzealous belt-tightening by the U.S. government in the near term could also slow down the "erratic" recovery.

In response to an audience question, the Fed chairman said a bitterly polarized debate this summer on raising the U.S. debt ceiling had roiled financial markets.

"We need a better process so that we don't have the same consequences that we saw with the [ratings]downgrade and with some of the financial volatility that was associated with the process," he said.

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