US Fed chief vows aggressive steps as recovery slows

WASHINGTON, Aug 28, 2010 (AFP) - The US Federal Reserve chief has vowed to take aggressive steps to boost the US economy as the world's largest economy's pace of growth slowed rapidly in the second quarter.

But Ben Bernanke, the central bank chairman, said Friday prospects for a pick up in economic expansion in 2011 appeared to remain despite the sharp government cutback Friday in economic growth to 1.6 percent in the April-June period.

(AFP file) Ben Bernanke pictured on July 2010 on Capitol Hill

The growth revision by more than half from the 3.7 percent in the first quarter came on the heels of a massive trade deficit and weak private inventory investment, signaling a more pronounced slowdown in recovery from recession.

The White House acknowledged Friday the lowered estimates meant more work was needed to keep the recovery on track.

"Four consecutive quarters of economic growth is positive news, but the revised numbers mean there is still much more we need to do to continue on the path to recovery," said a senior administration official with President Barack Obama, who is vacationing in Massachusetts.

Even if growth faltered, the central bank's policy body was ready to act forcefully.

The Federal Open Market Committee "is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly," Bernanke said.

It was his strongest signal yet that the central bank could resume massive purchases of longer-term debt if the economy worsened, a move that would add to the Federal Reserve’s already bloated balance sheet.

Speaking at annual central bank talks from Jackson Hole, the plush resort in the Teton mountains in Wyoming state, Bernanke said the Fed had adequate weapons in its arsenal to jolt the economy from any sharp slowdown, brushing off criticism by some analysts that it has been pushed to a corner.

"The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation," he said. "We do.

"The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool," he stressed.

The Fed has already pumped hundreds of billions of dollars into the economy since a home mortgage meltdown triggered the worst financial crisis in decades and plunged the economy into recession in December 2007.

The central bank has also slashed interest rates to virtually zero to spur growth, which spurted late last year before staggering again.

Bernanke's assurances in his closely watched speech helped assuage immediate market concerns.

Wall Street shares rebounded after sliding mostly this week, with the blue-chip Dow index jumping 164.84 points or 1.65 percent to 10,150.65, rebounding from Thursday's close below the 10,000 psychological threshold.

"Markets were looking for reassurance from Bernanke today, and the Fed chairman did not disappoint. His speech strengthens our conviction that the FOMC is likely to ease policy further in the relatively near future," said Nomura analyst Zach Pandl.

While acknowledging that growth and employment were slowing to levels not expected by the central bank, Bernanke was careful to rule out the possibility of the world's largest economy slipping back into recession.

"I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace," he said.

"Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place," he added.

Most recent economic data fell below already modest expectations and economists are reducing their growth forecast for the third quarter with some warning of a "double-dip" recession.

New home sales plunged to the lowest levels in half a century and the pace of orders for goods indicated the manufacturing sector slowed markedly, with business capital spending contracting massively.

Unemployment at 9.5 percent is the biggest concern as it has curtailed consumer spending, a key growth driver, and sent other equally important sectors reeling.

"The economic outlook, and in turn the monetary policy outlook, are both highly dependent on the pace of recovery in the labor market," said Carl Riccadonna, a senior economist with Deutsche Bank.

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