LONDON (AFP) — The US Federal Reserve still has "powerful tools" at its disposal to tackle the economic crisis even if its main interest rate has been lowered to near zero, chairman Ben Bernanke said Tuesday.
"The global economy will recover, but the timing and strength of the recovery are highly uncertain," Bernanke said in a speech at the London School of Economics.
"Government policy responses around the world will be critical determinants of the speed and vigor of the recovery."
Bernanke said he believes "that the Fed still has powerful tools at its disposal to fight the financial crisis and the economic downturn, even though the overnight federal funds rate cannot be reduced meaningfully further."
Last month, the Fed lowered its federal funds rate to a range of zero to 0.25 percent in its latest effort to reopen frozen credit markets.
The Fed chief said "communication" about rates can be an important tool in stimulating lending
"Even if the overnight rate is close to zero, the (central bank) should be able to influence longer-term interest rates by informing the public's expectations about the future course of monetary policy," he said.
He added that the Fed would continue its "extraordinary actions to ensure that financial institutions have adequate access to short-term credit" and reciprocal arrangements with other central banks to provide dollars where needed around the world.
Bernanke commented for the first time on what analysts called "quantitative easing (QE)," or increasing the money supply in a manner similar to the method used by the Bank of Japan in the 1990s.
But the US central bank chief said the Fed's approach "is conceptually distinct from quantitative easing" and could be described as "credit easing."
He said that both expand the central bank's balance sheet but that the two are different.
"In a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank (and) the composition of loans and securities on the asset side of the central bank's balance sheet is incidental," he said.
"In contrast, the Federal Reserve's credit easing approach focuses on the mix of loans and securities that it holds ... This difference does not reflect any doctrinal disagreement with the Japanese approach, but rather the differences in financial and economic conditions between the two episodes."
He said that "credit spreads are much wider and credit markets more dysfunctional in the United States today than was the case during the Japanese experiment with quantitative easing" and that the Fed is focused on reducing some rates "and improving the functioning of private credit markets more generally."
Bernanke said the big stimulus measures being considered by lawmakers and president-elect Barack Obama "could provide a significant boost to economic activity" but would be "unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system."
"History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively," he added.
One key to stabilizing the system, he said, was the Treasury injection of about 250 billion dollars of capital into commercial banks and other measures including deposit guarantees and the Fed's liquidity measures
"Those measures, together with analogous actions in many other countries, likely prevented a global financial meltdown in the fall that, had it occurred, would have left the global economy in far worse condition than it is in today," he said.
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