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Bernanke: Fed bond buys right move in weak economy

| Tuesday, Dec. 7, 2010

Undaunted by his critics, Federal Reserve Chairman Ben Bernanke said a weak economic recovery might call for more Fed action, not less.

In a televised interview, he said the key risk facing the economy is not inflation but protracted high unemployment -- and the possibility that the United States could stumble back into recession.

Bernanke used the appearance as a platform to rebut critics of the Fed's plan to buy about $600 billion in bonds in an effort to pump money and confidence into the economy. Some economists say the effort isn't needed, given signs of stabilization and improving growth in the economy. Others say the move could fuel inflation and make it harder for the Fed to manage an "exit strategy" from its extraordinary measures to prop up the economy.

Investors have been pushing up the price of gold since the Fed's new round of bond purchases was announced. One reason, commodity analysts say, is investors' desire to own gold as hedge against heightened risks of inflation. Gold rose to a new record Monday.

In an interview that aired Sunday on CBS' "60 Minutes," the Fed chairman defended his policies without reservation.

"We're not very far from the level where the economy is not self-sustaining" in its recovery, Bernanke warned. He described the economy as "close to the border," because annual economic growth of about 2.5 percent is needed just to keep a high unemployment rate from getting worse.

Bernanke's comments gave Treasurys a lift yesterday. The 10-year note rose 59.3 cents. That pushed the yield down to 2.93 percent from 3.00 percent late Friday.

But Treasurys could lose ground in the coming days as the government adds more supply to the market. The Treasury will auction $66 billion in new bonds this week, starting today with the sale of $32 billion in three-year notes.

"At the rate we're going, it could be four, five years before we are back to a more normal unemployment rate. Somewhere in the vicinity of say 5 or 6 percent," Bernanke said.

The Fed operates with a mandate from Congress to seek both general stability in consumer prices and full employment for the economy. Bernanke said the Fed's policies are designed to confront abnormally high joblessness, and well as to head off the risk of deflation in consumer prices or a dip back into recession.

He said such a return to recession is unlikely, but possible if protracted unemployment causes consumer confidence to erode.

Critics of the Fed policy say that, short of a major new emergency, the Fed should avoid a pull-all-stops approach to policy.

Expanding its balance sheet to nearly $3 trillion worth of bonds is something the Fed "should only consider if there were a dire threat to the financial system," economist David Malpass of Encima Global said in a report yesterday.

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