Bernanke to aid recovery with gradual boost

Ben Bernanke

While it's not time for emergency measures, the patient still needs the drip.
The US economy is grinding so painfully and haltingly toward recovery that the Federal Reserve looks poised to incrementally strengthen the dosage to keep growth on track.
Expect Fed Chairman Ben Bernanke to use a speech at an annual central bank conference in Jackson Hole, Wyoming, next Friday to acknowledge his disappointment over the pace of growth, even downgrade his outlook, and explain which medicines left in the Fed's cabinet are best suited to fortify the economy.
He looks unlikely to reach for shock treatment.
"With the recovery grinding to a halt in the first half of this year and the economy operating perilously close to a second recession, the Fed will remain on guard against a negative surprise on growth, and will be willing to act accordingly," Millan Mulraine, an economist with TD Securities, wrote in a note to clients.
So, how is Fed to administer further remedies?
With interest rate tools well exploited, Bernanke is most likely to focus on the Fed's balance sheet and opt for tinkering with the size and composition of its portfolio to get the world's largest economy out of its funk.
Interest rates are already near zero, and the central bank's policy-setting Federal Open Market Committee just two weeks ago signalled it is willing to hold borrowing costs at rock bottom levels for two years if necessary. There is little more that can be achieved using the rates tool.
Many of the balance sheet steps are well known, and each carries its own risks and rewards, which Fed staff would research carefully. But chances for a major new bond buying operation announced at Jackson Hole would appear limited currently.
In shaping its thinking, the Fed is likely guided by a sense that the current situation, though rather uncertain, merits a cautious approach and does not arise to the crisis proportions seen in 2008 through 2010 that justified bold and aggressive moves.
The last of these -- the $600 billion bond purchase program dubbed QE2 because it was the second installment of quantitative easing -- was the Fed's response to historically low inflation that risked tipping the US economy into a vicious cycle of falling prices and falling consumption and investment.
The situation today is different.
Unlike mid-2010, US inflation is now higher, and core inflation, which strips out volatile food and energy prices has accelerated. While higher readings are a concern for some Fed officials, they are not raising widespread alarm at the central bank on the assumption that overall inflation will fall as energy prices recede and that core prices will remain in check.
Instead, the focus is on stumbling growth and the risks ahead. A central group of policymakers on the Fed's decision-making committee see mounting evidence that growth originally forecasts at around 3 percent for the second half of the year will be slower. While not as dismal as the 1 percent that some Wall Street firms are forecasting, growth this sluggish would fall well short of what's needed to reduce the steep 9.1 percent jobless rate.
Looming large as a risk factor is Europe's long running sovereign debt saga, which is pummelling US financial markets and business confidence. So far Europe's woes and the market turmoil have not caused distress on the scale of the 2008/2009 credit crisis, but it is worrisome.
Against that backdrop, Bernanke appears unlikely to reach for dramatic measures, but the Fed could be primed to gradually boost the dosage for the ailing economy over the coming months.
One initial step might be simply to use verbal communication. It could commit to maintain its balance sheet, which has ballooned to $2.8 trillion from a pre-crisis level of around $900 billion, at this high level for an extended period of time -- even adding a timeframe just as it has for the fed funds rate.