In comments at the Federal Reserve Bank of Boston, Bernanke laid out the intellectual foundations for a new round of unconventional efforts to strengthen growth, which analysts expect will be announced after the Fed's next policy meeting Nov. 2 and 3. Bernanke clearly pointed to inflation, which is running below the Fed's goals, as the prime reason for taking more steps to stimulate the economy.

The Fed's policymaking committee "is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate," Bernanke said. He added that the committee will consider the potential costs and risks of those policies and is gathering more information about the economy before making a decision.

Underscoring the low inflation rate, the Labor Department said Friday that consumer prices rose 0.1 percent in September and were unchanged when volatile food and energy were excluded. Over the past year, the consumer price index (CPI) rose 1.1 percent, or 0.8 percent excluding food and energy.

The CPI news was followed Friday by an announcement from the Social Security Administration that recipients of the government social insurance program will not get a cost-of-living increase in 2011, the second year in a row. Federal rules say that consumer prices must have risen past their level when the last Social Security increase was awarded for higher benefits to take effect. The last price increase was in 2008, and Friday's numbers did not surpass that.

There was better economic news on the consumer front Friday, as the Commerce Department said that retail sales rose 0.6 percent in September.

In Boston, Bernanke expressed concern that the feeble pace of economic recovery will not be enough to give employment the jump-start it needs. "Growth next year seems unlikely to be much above its longer-term trend," he said, which would mean that "job creation may not exceed by much the increase in the size of the labor force, implying that the unemployment rate will decline only slowly."

Economists who study the Fed have become more confident in recent weeks that the central bank will announce plans to purchase hundreds of billions of dollars in bonds at its next meeting to try to boost growth, and Bernanke's speech both confirms that idea and spells out the rationale.

Fed leaders believe that annual price increases of 2 percent or so are most consistent with the central bank's mandate from Congress to maintain low joblessness and price stability, Bernanke said. Lately, most measures of inflation have been hitting the 1 percent range, and the Fed chairman left little doubt that he expects that trend to continue for some time.

"In effect, inflation is running at rates that are too low relative to the levels that the committee judges to be most consistent with the Federal Reserve's dual mandate in the longer run," Bernanke said.

"The risk of deflation is higher than desirable," he added, referring to a self-reinforcing cycle of falling prices that can have disastrous effects. Deflation, a continued drop in the prices of goods and services, can make consumers hold off on spending to help the economy because they believe prices will drop even lower.

In discussing the specific actions the Fed might take, Bernanke stuck to the widely discussed option of buying vast quantities of Treasury bonds. That would help the economy by lowering long-term interest rates, making it cheaper for Americans to take out a mortgage or for businesses to borrow money to build a new factory.

Bernanke did not mention any of the more unconventional steps that some of his Fed colleagues have recently broached, such as temporarily raising the central bank's target for inflation to make up for below-trend inflation in the recent past.

He did discuss the risks and trade-offs of buying bonds, though he did not characterize the downsides as so substantial as to eliminate the case for new action.

"There would appear - all else being equal - to be a case for further action," Bernanke said. "But nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used."

www.washingtonpost.com/wp-dyn/content/article/2010/10/15/AR2010101501819_pf.html

Oct. 15, 2010