Federal Reserve Chairman Ben Bernanke told Congress Wednesday that a new stimulus program is in the works that will entail additional asset purchases, the clearest indication yet that the central bank is contemplating another round of monetary easing.
Bernanke said in prepared remarks that the economy is growing more slowly than expected, and should that continue the central bank stands at the ready with more accommodative measures.
"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," he said
"However, given the range of uncertainties about the strength of the recovery and prospects for inflation over the medium term, the Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate."
Markets reacted immediately to the remarks, sending the Dow industrials up about 70 points in a matter of minutes. Gold prices continued so surge past record levels, while Treasury yields moved higher as well.
Minutes to the central bank's June meeting on Tuesday suggested that, while some members were pondering the possible need for additional easing amid a weak economy, the Fed is not yet ready to take any further action.
Dismal employment data last week suggested the economic recovery is faltering despite unprecedented monetary stimulus from the Fed, including a controversial $600 billion bond buying program completed at the end of last month.
If growth in the second half of the year proves weaker than the Fed expects and, importantly, if inflation moves back down, officials might then begin considering a third round of so-called quantitative easing, or QE3.
U.S. gross domestic product grew just 1.9 percent in the first three months of the year, and the second quarter does not appear to have been much better. For 2011 as a whole, the Fed sees U.S. GDP expanding 2.7 percent to 2.9 percent, down from forecasts in a range of 3.1 percent to 3.3 percent back in April.
