2011-08-29 11:23

Analysts say he'll work on building consensus before launching new round of easing

WASHINGTON - Federal Reserve Chairman Ben S. Bernanke's decision to extend next month's policy meeting to two days stoked speculation the extra time may allow him to forge a stronger consensus on monetary easing.

Bernanke, in a speech on Friday at the Fed's annual forum in Jackson Hole, Wyoming, said adding a second day to the September gathering would "allow a fuller discussion" of the slowing economy and the central bank's possible response. He said the Fed still has tools to boost growth, without specifying what they were or whether they would be used.

"The move to a two-day meeting means he'll work to build consensus" after confronting the most dissent during his tenure last month, Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc, which oversees about $57 billion in assets, said in an interview at Jackson Hole. "They will end up with QE3, but probably not in September," she said, referring to a third round of bond purchases, also known as quantitative easing. "They will edge closer to it in the September statement."

Stocks in the United States rose on Friday after initially extending losses, following Bernanke's lack of a clear signal of additional stimulus measures. Bernanke said the recovery is likely to improve in the second half of this year, and he sought to reassure investors and the public that US growth is safe in the long run.

Standard & Poor's 500 Index gained 1.5 percent to 1,176.80 at the 4 pm close of trading in New York on Friday. Yields on 10-year Treasuries declined to 2.19 percent from 2.23 percent the day before.

Previous two-day meetings have seen a higher probability of steps to cut borrowing costs, economists at Goldman Sachs Group Inc said. St. Louis Fed President James Bullard said adding a second day to the September meeting allows more time to review easing options, though rising inflation may prevent action in the near term.

"If the economy is weaker and the inflation picture moderates, we could consider more action," Bullard said on Friday in a Bloomberg Radio interview in Jackson Hole. "The call is much more difficult this year than last year. We have a much different inflation situation than last year."

The Fed's preferred inflation gauge, which excludes food and energy prices, rose 1.3 percent for the 12 months ending in June. That's up from a record low increase of 0.9 percent for the 12 months ending in December.

Last year, the Fed chief used his Jackson Hole speech to lay the groundwork for a second round of bond purchases. The central bank decided in November to buy $600 billion of Treasuries through June 2011.

Now, the Fed "needs to discuss the issue of bond buying and figure out how to frame and sell it," Swonk said.

Less than two hours before Bernanke's speech, the US government reported that the world's largest economy grew less than previously estimated in the second quarter, capping the weakest six months of the recovery that began in mid 2009. Gross domestic product climbed at a 1 percent annual rate, compared with an initial estimate of 1.3 percent growth.

The next Federal Open Market Committee (FOMC) session, previously scheduled to start and end Sept 20, will now conclude Sept 21. The change adds a fifth two-day meeting to this year's calendar, leaving three one-day sessions in March, August and December.

Bernanke's practice each year starting in 2007 has been to hold four two-day sessions, where Fed governors and regional presidents present updated economic projections, and four one-day meetings. The FOMC meets about every six weeks.

The Fed chief expanded the December 2008 meeting to two days from one and proceeded to lower the benchmark interest rate to near-zero from 1 percent. In February 2009, he added a second day to the four one-day sessions that year; the Fed then agreed at a two-day meeting in March 2009, originally scheduled for one day, to more than double purchases of mortgage debt and start buying $300 billion of Treasuries.

After its last meeting on Aug 9, the FOMC pledged for the first time to keep its key rate at a record low at least through mid-2013 to energize a recovery it said was "considerably slower" than anticipated. Three of the panel's 10 members voted against that decision, preferring to maintain a previous pledge to keep rates low for an "extended period" without a specific time frame.

Bernanke said that while the slumping housing market and financial-market volatility still pose challenges for the economy, his view of the long-term outlook is "more optimistic".

"The growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years," Bernanke said at the mountainside symposium hosted by the Kansas City Fed.

Bernanke, 57, a former Princeton University economist, said the debate over raising the US debt limit "disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold US financial assets or to make direct investments in job-creating US businesses."

Bloomberg News