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Originally published Friday, August 31, 2012 at 8:26 PM

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Ben Bernanke says Fed ready for forceful action to aid recovery

At the Jackson Hole economic summit, Federal Reserve Chairman Ben Bernanke used uncharacteristically direct language to suggest the Fed could soon act to bolster growth and lower unemployment.

The Washington Post

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JACKSON HOLE, WYO. - Federal Reserve Chairman Ben S. Bernanke said Friday that the central bank plans to respond forcefully to the nation's sluggish recovery and mounted a powerful defense of the Fed's actions to date to keep the economy growing.

In his widely anticipated remarks at the Jackson Hole economic summit, Bernanke did not say that action was imminent, but he used uncharacteristically direct and forward-looking language to suggest that the Fed could soon act to bolster growth and lower unemployment.

The Fed chairman said the central bank intends to be "forceful ... in supporting a sustainable recovery." With Europe's financial crisis and the United States' looming budget cuts and tax hikes posing major risks for the recovery, he said, economic growth is "far from satisfactory," and he pledged the Fed will take additional steps to help the economy as needed.

As is common with Fed pronouncements, Bernanke hinted but offered no certainty of action to come. Still, the urgent tone of his remarks will leave investors disappointed if the Fed does not launch new stimulus at its Sept. 12-13 policymaking meeting.

"We must not lose sight of the daunting economic challenges that confront our nation," Bernanke said. "The stagnation of the labor market in particular is a grave concern, not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years."

Also next week, the European Central Bank (ECB) will announce details of the steps it is taking to alleviate the continent's financial crisis, a major drag on the U.S. economy. If the ECB takes dramatic action, it might reduce the burden on the Fed to act.

Bernanke's speech comes at a politically and economically tenuous moment. The Fed is facing intense political criticism from the Republican Party, with key lawmakers urging the central bank to demonstrate "humility" and hold back from any new actions to stimulate growth.

A number of Republicans, including GOP vice presidential nominee Paul Ryan, have said the Fed's actions have endangered the economy.

The Fed chairman, a Republican, seemed to swipe back at these criticisms in his remarks.

He invoked a GOP hero, the late economist Milton Friedman, to defend the value of "balance-sheet" policies that involve the Fed creating money to buy Treasury bonds and mortgage bonds to bring down interest rates.

"Such policies can be effective, and ... in their absence, the 2007 [to] '09 recession would have been deeper and the current recovery would have been slower than has actually occurred," Bernanke said.

In his speech, Bernanke was upfront about the central bank's limits. As he has said several times in speeches and testimony, he insisted that Congress and the president carry most of the burden for making sure the economy is healthy.

"Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve," he said. "In particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes."

He again implored policymakers to ensure that the nation doesn't go over the fiscal cliff with the series of deep spending cuts and sharp tax hikes set to take effect at the end of the year.

Most economists believe that those measures would tip the U.S. economy back into recession -- perhaps a deep one.

"Policymakers should take care to avoid a sharp, near-term fiscal contraction that could endanger the recovery," he said.

Bernanke acknowledged that unconventional actions taken by the Fed might pose unexpected risks, such as causing losses for the Fed or sparking inflation.

"The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out further use of such policies if economic conditions warrant," he said.

If the Fed takes any action next month, many economists say, it is likely to extend its plan to keep interest rates near zero for another year, from late 2014 to late 2015.

But this action, like other policies under consideration, could have only a modest impact on the nation's economic health.

An earlier analysis by Fed economists suggests that keeping interest rates ultralow for a longer period would bring unemployment to about 7.8 percent by the end of the year and 7.2 percent by the end of next year, only slightly lower than it is projected to be.

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