Federal Reserve chairman Ben Bernanke told lawmakers on Wednesday that his central bank was preparing additional stimulus measures if the American economy fails to recover at a faster pace. Further monetary easing would include additional asset purchases to encourage banks to invest.
“Once the temporary shocks that have been holding down economic activity pass, we expect to again see the effects of policy accommodation reflected in stronger economic activity and job creation,” Bernanke said in his prepared statement. The American economy added an abysmal 16,000 jobs last month while unemployment rose to 9.2 percent.
The Fed expects higher growth in the near future but “remains prepared to respond,” according to its chairman if “an adjustment in the stance of monetary policy would be appropriate.”
The Federal Reserve recently completed the second leg of its quantitative easing program which involved the purchase of up to $600 billion worth of United States Treasury bonds in an effort to boost liquidity and investments in riskier markets.
Since December 2008, the Federal Reserve has financed nearly $2 trillion in government debt. Before the start of the recession, the Fed held no more than $800 billion of Treasury notes on its balance sheet.
The expansionary policy has been controversial as it artificially drives up financial stock despite lackluster growth in the rest of the economy. Moreover, increased liquidity drives down the price of the dollar which is beneficial to American exporters but potentially causing turmoil abroad. Because global trade in oil and commodities is largely denominated in US dollars, a greater dollar supply inflates the costs of fuel and food which is especially detrimental to poor countries.
Prices are also soaring at home. Although the official inflation figure has remained fairly stable, it excludes the rising costs of food and energy. Americans in reality are estimated to pay 8 percent more for necessities than they did in January. Rising prices for raw materials and components affect American manufacturers while imports are becoming more expensive.
As the dollar loses value, investors are reaching for gold and silver while billions in investment are flooding emerging markets, amplifying the risk of their economies overheating.
The Fed has little options at its disposal besides pumping money into the economy. Interest rates are already near zero and will remain there for “an extended period,” said Bernanke in April.