The Bernanke Put

"The Federal Open Market Committee will strongly resist deviations from price stability in the downward direction," Bernanke said in a speech opening the Fed's annual summer policy retreat.
Bernanke downplayed concern that the economy would fall back into another downturn, or a double-dip recession.
He said the economy would continue to grow at a slow pace in the last four months of the year and the pace of growth would pick-up in 2011. See related story on second-quarter growth.
Bernanke said there was only a low risk of deflation. But he acknowledged that inflation has dropped to a level slightly below that which FOMC participants view "as most conducive to a healthy economy in the long run."
But he spoke at length about the tools left in his toolkit to fight deflation and promised to use them if the outlook deteriorated significantly.
Responding almost directly to an op-ed published Thursday by ex-Fed vice chairman Alan Blinder saying the Fed was running low on ammo, Bernanke said: "The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool."
At the top of his list of options -- more purchases of Treasurys by the Fed. Bernanke said these purchases would ease financial market conditions.
He said the central bankers thought that buying Treasurys was the proper course of action but noted "we do not rule out changing the reinvestment strategy if circumstances warrant."
Prior to the speech, economists were hoping that Bernanke would spell out the criteria for further extraordinary policy moves. Bernanke's helicopter could move to new altitude
Bernanke said the FOMC "has not agreed on specific criteria or triggers for further action."
In early August, the Federal Open Market Committee took a baby step toward further quantitative easing by deciding to hold the size of the Fed's balance sheet constant through reinvesting principal repayments from mortgage securities into Treasurys
A slowing economy has caused the Fed to swiftly reconsider its policy stance - shifting away from an exit strategy towards consideration of further easing.
The economy is slowing at a time when the Fed has already cut interest rates to close to zero. Since March 2009, the Fed has promised to keep rates low for an "extended period."
Bernanke said the FOMC would consider modifying the language to communicate to investors that it plans to keep the federal funds rate low for a longer period than is currently priced in markets.
He also said the Fed could lower the rate of interest the Fed pays banks on the reserves they park at the central bank, though he stressed that the effect in isolation would likely be relatively small.
One policy option Bernanke rebuffed was to increase medium-term inflation goals above levels consistent with price stability. "I see no support for this option on the FOMC," the central bank chief said.