US Fed to tighten policy when outlook improves

WASHINGTON (AFP) – Federal Reserve chief Ben Bernanke signaled Thursday he was in no hurry to tighten monetary policy, saying action will be taken when the US economic outlook has "improved sufficiently."

Shoppers make their way through Union Square in New York.

He said that the central bank had a wide range of tools for tightening monetary policy, which was eased as the country scrambled to contain the worst financial crisis in decades.

"When the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration," Bernanke said at a Federal Reserve board conference on "key developments in monetary economics" in Washington.

The Fed has cut interest rates to virtually zero percent to jolt the world's largest economy from recession and moved to flood the system with money to prime the economy, which has contracted since December 2007.

Among the unconventional steps taken to heal the economy was a so-called "quantitative easing" policy that included buying up long-term US Treasury securities totaling 1.75 trillion dollars to inject liquidity into the financial system.

The last meeting of the Fed's policy makers decided to continue the purchase program up to March 2010.

"The principal goals of our recent security purchases are to lower the cost and improve the availability of credit for households and businesses," Bernanke said. "As best we can tell, the programs appear to be having their intended effect."

Investors have been looking for any signs of the Fed tightening policy after Australia this week became the first major economy to raise rates in a sign that the global economy was recovering from the worst recession in decades.

"We will calibrate the timing and pace of any future tightening, together with the mix of tools, to best foster our dual objectives of maximum employment and price stability," Bernanke said as he outlined the Fed's "exit strategy."

"My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period.

"At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road," he explained.

President Barack Obama's administration has been particularly concerned about an increasing unemployment rate even as most government and private data showed the economy emerging from recession.

Last week, figures showed job losses accelerated to 263,000 in September, pushing the unemployment rate to a new 26-year high of 9.8 percent.

Since the start of the recession nearly two years ago, the number of unemployed has increased by 7.6 million to 15.1 million.

The Obama administration and his Democratic party leaders are reportedly considering a range of measures, including giving employers a tax credit for creating new positions, as fears mount of a "jobless recovery" when growth resumes.

The US economy contracted at a 0.7 percent pace in the second quarter, nearly emerging from the recession that slashed output by 6.4 percent in the first quarter, based on the most recent official data.

Most economists expect growth to return in the third quarter but say the recovery could fade without job growth.

In a sign of hope for an economic rebound, new claims for unemployment benefits dropped to a nine-month low in the past week, the US government said in a report Thursday.

But a congressional report out Friday warned that a growing wave of foreclosures threatens to overwhelm US government rescue efforts aimed at helping people remain in their homes.

Bernanke said banks currently held huge amounts of excess reserves at the Federal Reserve -- 848 billion dollars as of September 30 from only 16 billion dollars before the crisis started.

The reserves earn a paltry 0.25 percent in Fed interest.

"When the time comes to tighten policy, we can raise the rate paid on reserve balances as we increase our target for the federal funds rate," he said.

Source: AFP

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