WASHINGTON - Ben Bernanke defended some of the Federal Reserve's aid programs for banks Friday while pledging to provide support to the markets "as needed."
The Fed chairman gave no details about the central bank's potential plans to help the markets in a speech at the economic symposium in Jackson Hole, Wyo.
Bernanke credited Fed programs to boost bank liquidity and buy assets such as mortgage-backed securities - commonly referred to as "quantitative easing" - with helping pull credit markets and the broader economy out of the financial crisis. Yet his speech carefully avoided mention of future steps the central bank could take to speed up the excruciatingly slow recovery.
"Over the past five years the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market," Bernanke said in his prepared remarks. "Taking due account of the uncertainties and limits of its policy goals, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger recovery and sustained improvement in labor market conditions in a context of price stability."
Bernanke recounted how in 2007 the Fed and other central banks focused on liquidity steps - in addition to the Fed's normal rate-setting policies - to ease what he called "dysfunction in credit markets." This included lowering the discount rate and providing banks with term loans.
Later, Bernanke recalled, the Fed took "extraordinary steps to provide liquidity and support credit market functioning," including the launch of certain emergency lending facilities. As a bank regulator, he added, the Fed also led the
Though those steps skirted an even worse situation for financial markets, the economy still suffered problems, he said. The Fed then turned to "nontraditional policy approaches," including the purchase of MBS and other securities.
He defended the central bank's use of its balance sheet to buy up bonds, but he acknowledged that assessing the impact of QE on the broader economy is difficult.
"While there is substantial evidence that the Federal Reserve's asset purchases have lowered longer-term yields and eased broader financial conditions, obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual - how the economy would have performed in the absence of the Federal Reserve's actions - cannot be directly observed," he said.
The Fed's use of nontraditional monetary policies has costs as well as benefits, but the risks of such unorthodox steps have proven to be within reason, Bernanke said.
"The benefits and costs of nontraditional monetary policies . will also vary over time, depending on factors such as the state of the economy and financial markets and the extent of prior Federal Reserve asset purchases," Bernanke said. "The hurdle for using nontraditional policies should be higher than for traditional policies. At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant."
