Boosting the Federal Stimulus

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Federal Reserve Chairman Ben Bernanke outlined the central bank's options to continue stimulating the slowing economic recovery. In a speech at the Kansas City Federal Reserve's Economic Symposium in Jackson Hole, Wyo., Bernanke said one option is expanding purchases of longer-term securities, though he warned that the Fed doesn't fully understand the precise impact of these purchases and that these additional purchases could lead to an increase in inflation expectations. The Fed chief also said the Federal Open Market Committee could modify its post-meeting communications to reflect that it anticipates keeping the target for the federal funds rate low for a longer period than is currently priced in markets. Finally, he said the Fed could reduce the interest paid on excess reserves, which could provide banks with an incentive to increase their lending to nonfinancial borrowers or to participants in short-term money markets.

The FOMC has held its target for the federal funds rate in a range of zero to 25 basis points since December 2008 and has purchased more than $2 trillion in agency debt, mortgage-backed securities and Treasury securities to aid economic recovery. The panel recently voted to reinvest payments of principal on agency securities into longer-term Treasury securities to prevent its balance sheet from shrinking as the economic outlook has weakened. Read the Speech.

Source: ICBA NewsWatch Today, read NewsWatch Today archives here.