Fed ready to provide more stimulus, Bernanke says

Further measures to stimulate the stagnant U.S. economy may be needed if conditions worsen, Federal Reserve chairman Ben Bernanke told a Congressional hearing Wednesday.

That stimulus could take a variety of forms, Bernanke said. One option could see the Fed launching a third round of Treasury bond buying — called quantitative easing. It could also cut the interest paid to banks on the reserves they hold. That would be one way of encouraging banks to lend out more money.

A third option could see the U.S. central bank providing the markets with more "explicit guidance" about just how long it planned to keep rates at record-low levels. The key federal funds overnight lending rate has been at a rock-bottom zero-to-0.25 per cent level for more than two years.

Bernanke's comments allowed stock markets to extend early gains. The Dow Jones industrial average rose 121 points in afternoon trading but pared that gain to finish up 44.73 at 12,491.61. The Nasdaq composite rose 15.01 points to 2,796.92. The S&P/TSX composite index gained 90.86 points to 13,324.94.

'The possibility remains that the recent economic weakness may prove more persistent than expected' —Federal Reserve chairman Ben Bernanke

Bernanke said the recent economic weakness in the U.S. economy should improve later this year. But he said the Fed was prepared to move if the weakness showed signs of persisting or worsening.

"The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support," he told the House financial services committee. 

"The Federal Reserve remains prepared to respond should economic developments indicate that an adjustment of monetary policy would be appropriate."

The Fed is not expected to begin raising U.S. interest rates until at least the middle of next year. 

"This reinforces the message from yesterday's minutes that [further quantitative easing] is not completely off the table at this point, although the Fed would have to see more signs of deterioration than it has so far observed presumably to take such action," said CIBC World Markets senior economist Peter Buchanan.

"It also suggests the Fed chief is among the committee members who see a potential need for such action," he added.

Bernanke's comments were the first he's made since the release last week of a dismal employment report that showed the entire U.S. economy generated just 18,000 additional jobs in June. That was the poorest showing in nine months.

The U.S. unemployment rate stood at 9.2 per cent last month — the highest this year.