Bernanke: The Fed Won't Let the Economy Falter

Federal Reserve Chairman Ben Bernanke on Friday paved the way for a second-round of so-called quantitative easing, saying the central bank is prepared to undertake another round of extraordinary measures -- such as buying up long-term debt -- should the prognosis for the economy get worse.

Bernanke's stimulating remarks dovetailed nicely with Friday's revised figure for second-quarter gross domestic product, which was cut to a 1.6% annualized growth rate from an initial estimate of 2.4%. The good news is that the latest reading was better than economists and the market were expecting. The bad news is that the economy isn't growing fast enough to make a dent in perniciously high joblessness. More worrisome is that the economy could slow or even stall at such depressed levels.

The Federal Open Market Committee (FOMC), which sets interest-rate policy, "is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly," Bernanke read from prepared remarks at the Fed system's annual symposium in Jackson, Wyo.

The stock market responded positively to the GDP and Fed policy news, with the blue-chip Dow Jones Industrial Average ($INDU) jumping more than 100 points in midday trading. Bonds declined on the news, as the yield on the benchmark 10-Year Treasury note rose to 2.61% after trading as low as 2.42% Thursday. (Yields and prices move in opposite directions.)

Although Bernanke said the Fed continues to expect economic recovery through 2011 and beyond (which would eliminate the need for special measures), it remains willing to do whatever is necessary in case its forecast is wrong. Among the policy actions outlined by the Fed chief were buying up long-term securities and cutting the interest rate banks receive on reserves they hold in the Federal Reserve system.

As to what the Fed would actually do and when, Bernanke said the FOMC "has not agreed on specific criteria or triggers for further action," but is keeping a keen eye on the dreaded prospect of deflation.

"The FOMC will strongly resist deviations from price stability in the downward direction," Bernanke said. "Falling into deflation is not a significant risk for the United States at this time," the Fed chief added, but that's partly true because the public understands that the central bank remains vigilant in attacking the threat.

"Regardless of the risks of deflation, the FOMC will do all that it can to ensure continuation of the economic recovery," Bernanke said.