The Federal Reserve could end up buying more than the $600 billion in U.S. government bonds it has committed to purchase if the economy fails to respond or unemployment stays too high, Fed Chairman Ben Bernanke said.
The Fed will regularly review the policy and could adjust the amount of buying up or down depending on the economy's path, he added.
In a rare televised interview, Bernanke told the CBS program 60 Minutes the Fed's actions are aimed at supporting what is still a fragile economic recovery, dismissing critics who argue the policy will lead to future inflation.
This fear of inflation I think is way overstated, Bernanke said in the interview aired on Sunday.
What we're doing is lowering interest rates by buying Treasury securities, he said. And by lowering interest rates, we hope to stimulate the economy to grow faster. The trick is to find the appropriate moment when to begin to unwind this policy. And that's what we're going to do.
Bernanke said it would take four to five years for the country's unemployment rate, which rose to 9.8 percent in November, to come down to what he called more normal levels of around 5 percent to 6 percent.
Asked if the central bank could go beyond the $600 billion of bond buys announced at its November meeting, Bernanke said: Oh, it's certainly possible. It depends on the efficacy of the program. It depends, on inflation. And finally it depends on how the economy looks, he said.
But he also did not rule out stopping short of the total.
We're gonna be regularly reviewing this, Bernanke said. This is not something that we've set into automatic motion going forward. We want to continue to think about it. Whether it needs to be changed. Whether it needs to be increased or decreased or modified.
The U.S. economy grew at a modest 2.5 percent annual rate in the third quarter, and more vigorous growth is needed to bring down unemployment.
The 60 Minutes interview is as part of a broader effort to raise the Fed chairman's public profile in order to counter critics of Fed policy -- both in Washington and within the central bank itself.
NOT PRINTING MONEY
The decision to offer further monetary stimulus at a time overnight borrowing costs are already effectively at zero and the banking system is awash with $2.3 trillion in Fed-created credit has proven controversial both at home and abroad.
Many economists, some Republican lawmakers, and a small but vocal minority of top officials within the Fed worry that the central bank's actions are unlikely to do much to spur economic growth with borrowing costs already unusually low.
Instead, they worry the massive bond purchases will lead to distortions in financial markets, potentially sparking asset bubbles in unexpected places. Some also fear, as Charles Plosser of the Philadelphia Fed has argued, the expansion of reserves could create the kindling that will spark inflation in the future.
But Bernanke continued to argue firmly against that view.
One myth that's out there is that what we're doing is printing money, he said. We're not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way.
While the Fed is pressing hard on the monetary accelerator, banks would have to ramp up lending for the money supply to increase -- and loan demand is still tepid.
Bernanke said the Fed has both the tools and the will to withdraw liquidity from the banking system if inflation begins to dart higher, even if past experience makes some analysts skeptical.
We could raise interest rates in 15 minutes if we have to, Bernanke said in the interview, which was taped on Tuesday. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time.
That time is not now.
CLOSE TO THE BORDER
Part of the rationale for Fed easing is the fear that a trend of slowing inflation could turn into an outright deflation, a damaging downward spiral in prices and wages that is particularly difficult for central banks to fight.
Bernanke said the current risk of deflation was not very big, but only because the Fed had decided to act aggressively.
If the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern, Bernanke said.
Asked if the recovery was self-sustaining, Bernanke said: It may not be. It's very close to the border.
Inflation has been running below the Fed's implicit target of about 2 percent, by some measures dipping beneath 1 percent. That is a danger zone that, in the view of many Fed officials, makes the country too vulnerable to unexpected shocks.
With Europe still mired in a debt rut and many economists worried about the ability of China to sustain runaway growth rates, it is not difficult to imagine where such disturbances might come from.
Speaking broadly about the social consequences of the economic downturn, Bernanke decried the rise in income and wealth inequality in unusually sharp terms.
It's a very bad development, he said. It's creating two societies.
He stressed that the issue of long-term unemployment is a major concern. Over 40 percent of unemployed Americans have been jobless for six months or more, the highest reading on record.
The ability of interest rate policy to affect such complex matters remains an open question. But Bernanke appears willing to use monetary policy to its fullest extent in trying.
People who are unemployed for such a long time ... their skills erode. Their attachment to the labor force diminishes and it may be a very, very long time before they find themselves back in a normal working position.
The last time Bernanke appeared on 60 Minutes was in March 2009, just as the worst phase of the global financial crisis was beginning to subside.