#Bernanke: Federal Reserve is ‘prepared to respond’ if economic recovery falters

By Neil Irwin, Published: July 13

The Federal Reserve is prepared to take new action if the recovery falters, Chairman Ben S. Bernanke said Wednesday, raising the possibility of resuming un­or­tho­dox methods of trying to pump money into the economy.
Bernanke expects that the economy will strengthen over the remainder of the year as temporary drags such as higher fuel prices dissipate, according to his testimony before the House Financial Services Committee. But he also acknowledged that there is no way to be certain, and he said that the Fed would act if its outlook proves overly optimistic. His list of possible responses included a new round of Treasury bond purchases by the Fed. Only two weeks ago, the central bank completed a $600 billion effort to support the economy along those lines.

“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risk might reemerge, implying a need for additional policy support,” Bernanke said in his twice-yearly report to Congress on monetary policy. He added that the Fed is “prepared to respond” if economic conditions make it appropriate.
Those comments stopped short of an indication that the Fed will take new action, and according to minutes of its last policy meeting, released Tuesday, only “some” members of the policy committee are in favor of action. And unlike in a speech last August in which Bernanke raised the possibility of bond purchases because of a weakening economy, this time he also outlined a competing scenario: how the Fed would remove its support struts from the economy should inflation become a problem.
Nonetheless, the Fed chairman was more receptive to new steps to easing monetary policy than he was in a news conference just three weeks ago. In that span, economic data has generally been soft, particularly a report Friday that showed weak job creation in June and a rising unemployment rate. The Fed is charged by Congress with maintaining stable prices and maximum employment.