Ben S. Bernanke, the Federal Reserve chairman, and Donald L. Kohn, a Fed governor, at the start of the annual Federal Reserve conference in Jackson Hole, Wyo., on Friday.
JACKSON HOLE, Wyo. — The Federal Reserve chairman, Ben S. Bernanke, signaled once again on Friday that the central bank was prepared to act if the economy continued to weaken, as yet another economic report confirmed that the recovery had slowed to a crawl.
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Donald L. Kohn, left, a Federal Reserve governor, and Ben S. Bernanke at the Fed conference.
Mr. Bernanke made clear that while the Fed could take various steps, including large purchases of government debt, “central bankers alone cannot solve the world’s economic problems.” Speaking at the Fed’s annual symposium here, he hinted broadly that political leaders had to take steps to tackle the deficit and the trade imbalance.
Hours before Mr. Bernanke spoke, the Commerce Department lowered its estimate of economic growth in the second quarter to an annual rate of 1.6 percent, after originally reporting last month that growth from April through June was 2.4 percent. Economists had been predicting a steeper decline, and stock prices rose after the markets opened.
While Mr. Bernanke announced no new steps that the Fed would take immediately, he said the central bank was determined to prevent the economy from slipping into a cycle of falling wages and prices, a situation he said he did not think was likely. Instead he predicted that growth would continue modestly in the second half of the year and pick up in 2011.
Mr. Bernanke said the Fed, having kept short-term interest rates at nearly zero since 2008, had essentially four options:
It can purchase more government debt and long-term securities. It can try to coax down long-term interest rates by announcing its intention to keep short-term rates extremely low for even longer than the markets currently expect. It can lower the interest rate it pays on the funds banks hold at the Fed. And it can raise its medium-term target for inflation, which would discourage banks from sitting on their cash.
Mr. Bernanke suggested that the first of those options was the most likely, and all but ruled out the last two.
While the Fed committee that sets monetary policy was prepared to take new steps “if the outlook were to deteriorate significantly,” he said, it “has not agreed on specific criteria or triggers for further action.”
As Mr. Bernanke’s remarks were released publicly, stock prices immediately fell, a sign that investors were hoping for some concrete signs that the Fed would step in to try to bolster the economy. But as the market digested the chairman’s full remarks, prices rebounded and the Dow Jones industrial average rose 164.84 points, or 1.65 percent, to 10,150.65. The yield on the benchmark 10-year Treasury note rose to 2.64 percent, from 2.48 percent. The revised second-quarter growth data came after a week that showed that the economic retrenchment that began in the second quarter had spilled into the summer, with a sharp slowdown in new-home sales and a drop in sales of factory goods.
Consumer spending rose 2 percent in the second quarter — slightly better than the Commerce Department had initially projected. And a closely watched survey by the University of Michigan and Thomson Reuters showed that consumer sentiment ticked up marginally in August, while remaining well below levels seen during the previous six months.
In his first public remarks since the Fed took a modest step on Aug. 10 to lift the economy — a decision to invest proceeds from its huge mortgage-bond portfolio in long-term Treasury securities — Mr. Bernanke tried in some respects to dampen expectations that the Fed could make significant headway against the economic sluggishness.
Alan S. Blinder, a former Fed vice chairman and a Princeton professor, noted that Mr. Bernanke focused his remarks on the costs as well as the benefits of additional action to help the economy.
“The Fed has run out of the strong tools, and is turning to the weak ones,” Mr. Blinder said in an interview here. “When you’re fighting in a foxhole and you’ve used up the machine guns and hand grenades, then you pull out the swords and start throwing rocks.”
Mr. Blinder said that the economy seemed “substantially worse” than it did three months ago — and that Mr. Bernanke had acknowledged the deterioration, cautiously.
The Obama administration is looking to the Fed to do more to spur the recovery, since its own options are few, given the political paralysis in Congress as midterm elections approach. President Obama, vacationing on Martha’s Vineyard, discussed the economy for about 15 minutes with Mayor Michael R. Bloomberg of New York before the two men played golf.
Mr. Bernanke avoided wading into the rancorous political debates over fiscal policy, instead focusing on the two objectives that form the Fed’s legal mandate: price stability and maximum employment.
Inflation has been running well below the Fed’s unofficial target rate of 1.5 to 2 percent. While conceding that inflation had fallen “slightly below” the desirable level, Mr. Bernanke said deflation was “not a significant risk” right now. He said the Fed would “strongly resist deviations from price stability in the downward direction.”
Mr. Bernanke predicted the economy would continue to grow the rest of this year, “albeit at a relatively modest pace.” He said the “preconditions for a pickup of growth in 2011 appear to remain in place,” as banks increase lending, worries over the European sovereign debt crisis abate and consumers save more.
Jackie Calmes contributed reporting from Vineyard Haven, Mass., and Motoko Rich from New York.
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