Bernanke: US 'close to border' of recession, Federal Reserve may intervene

Undaunted by his critics, Federal Reserve Chairman Ben Bernanke says a weak economic recovery may call for more Fed action, not less.

In a televised interview, he said the key risk facing the economy is not inflation but protracted high unemployment – and the possibility that the US could even stumble back into recession.

Mr. Bernanke used the appearance as a platform to rebut critics of the Fed's plan to buy about $600 billion in bonds in an effort to pump money and confidence into the economy. Some economists say the effort isn't needed, given signs of stabilization and improving growth in the US economy. And others say the move could fuel inflation and make it even harder for the Fed to manage an "exit strategy" from its extraordinary measures to prop up the economy.

Investors have been pushing up the price of gold since the Fed's new round of bond purchases was announced. One reason, commodity analysts say, is investors' desire to own gold as hedge against heightened risks of inflation.

But in an interview that aired on CBS's "60 Minutes" Sunday night, the Fed chairman defended his policies without reservation.

"We're not very far from the level where the economy is not self-sustaining" in its recovery, Bernanke warned. He described the economy as "close to the border," because annual economic growth of about 2.5 percent is needed just to keep an already-high unemployment rate from getting even worse. (About 125,000 new people enter the labor force each month, on average.)

More Fed action 'certainly possible'

As if to underscore Bernanke's point, the unemployment rate rose in November to 9.8 percent, even though the economy added 39,000 jobs for the month.

Bernanke said "it's certainly possible" that the Fed would expand its planned bond purchases beyond $600 billion during the next half year or so, if economic conditions warrant.

To many stock investors, that's a reassuring message that the Fed won't let the economy sink at a time when a public-debt crisis in Europe is stirring fears of stagnant growth in euro zone economies. However, Bernanke offered a fairly gloomy outlook for the economy, so in that sense he's not cheerleading a bull market.

Major Wall Street stock indexes fell slightly Monday morning, while Treasury bond prices rose.

"At the rate we're going, it could be four, five years before we are back to a more normal unemployment rate. Somewhere in the vicinity of say 5 or 6 percent," Bernanke said.

The Fed operates with a mandate from Congress to seek both general stability in consumer price and full employment for the economy. Bernanke said the Fed's current policies are designed to confront abnormally high joblessness, and well as to head off the risk of deflation in consumer prices or a dip back into recession.

He said such a return to recession is unlikely, but possible if protracted unemployment causes consumer confidence to erode.

A 'dire threat'?

Critics of the Fed policy say that, short of a major new emergency, the Fed should avoid a pull-all-stops approach to policy.

Expanding its balance sheet to nearly $3 trillion worth of bonds is something the Fed "should only consider if there were a dire threat to the financial system," economist David Malpass of Encima Global said in a report Monday.

"Having the Fed buy bonds in the absence of a crisis is unprecedented and raises many risks – it manipulates markets, creates a bigger overhang when the Fed tries to unload the bonds, [and] risks capital losses at the Fed if interest rates rise," Mr. Malpass warned.

Skeptics of the Fed's latest monetary gambit also worry that it will be ineffectual in creating jobs – especially if it fails to bolster public confidence in recovery. Interest rates on the 10-year Treasury bonds have edged up, not down, since the central bank's new bond-buying effort was announced this fall.

Bernanke avowed "100 percent" confidence in the Fed's ability to withdraw its monetary stimulus at the appropriate time.

He said "fear of inflation ... is way overstated," given that unemployment is so high (which holds down labor-cost pressures). Bernanke said Fed policies appear to be succeeding at preventing deflation, or falling prices that can erode wages and economic confidence.