bernankes remarks/from gata

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    WASHINGTON, July 23 -- The Federal Reserve should
    stand ready to cut overnight lending rates to zero if the
    economy needs an extra jolt, said a Fed governor on
    Wednesday.

    "We should be willing to cut the funds rate to zero, should
    that prove necessary to provide the required support to
    the economy," Federal Reserve Board Gov. Ben Bernanke said
    in a speech at the University of California, San Diego. A
    copy of the speech was released in Washington.


    His remarks helped propel bond prices higher.


    Following the speech, a benchmark 10-year note rose
    14/32 at 96 14/32. Its yield fell to 4.07 percent from 4.15
    percent in the previous session. The 10-year struck a
    seven-month yield high at 4.21 percent Monday after
    falling to a 1958 low 3.07 percent in mid-June.


    And the U.S. dollar extended its broad decline after the
    speech. Euro/dollar was recently up 1.1 percent at
    $1.1450. Euro/yen improved 0.9 percent at 135.95.
    Sterling/dollar rose 0.8 percent at $1.6086.


    It was Bernanke's speech in November last year that
    helped fuel a huge rally in the bond market on the notion
    the Fed might take the unconventional step of buying
    Treasury securities to hold down borrowing costs.


    The policymaking committee's point man on deflation
    said the risk of further declines in inflation from an already
    low level outweighs the risk of a resurgence in inflation.


    "We are currently in a range where undershooting our
    inflation objective by 1 percentage point is more costly
    than overshooting by 1 percentage point," he said.


    "Hence, monetary ease appears to be indicated for a
    considerable period," Bernanke said, adding "keeping
    the funds rate target at or near its current level for an
    extended period may be sufficient."


    The Fed cut the key federal funds rate target by a
    quarter point to a 45-year low of 1.0 percent on June 25
    in an effort to boost the economy and encourage a bit
    of inflation.


    Bernanke said that because of substantial amounts of
    excess capacity in the economy, the Fed should be
    mindful of continued low inflation.


    "Even if the economy recovers smartly for the rest of this
    year and next, the ongoing slack in the economy may
    still lead to continuing disinflation," Bernanke said,
    adding "stable expectations of inflation and the recent
    weakening of the dollar may help to offset that tendency."


    Bernanke said he sees the core rate of inflation falling to
    0.7 percent, from the current 1.2 percent, by the end of
    next year.


    Bernanke said that the Fed should be more worried
    about slowly rising prices than falling prices.


    "Inflation in the range of 0.5 percent per year in the
    United States in the couple of years, though relatively
    unlikely, is considerably more likely than deflation of 0.5
    percent per year," Bernanke said.


    The remarks indicate that the Fed is in a holding pattern
    before deciding what its next move will be, said economist
    Drew Matus of Lehman Brothers in New York.


    "This speech simply confirms that the Fed has a broader
    tolerance range in regards to economic developments
    than it has had in the past," said Matus.


    Bernanke again alluded to the possibility that the central
    bank might use non-traditional methods to stimulate the
    economy by keeping long-term interest rates low.


    "Such measures might include, among others, increased
    purchases of longer-term government bonds by the Fed,
    an announced program of oversupplying bank reserves,
    term lending through the discount window at very low rates,
    and the issuance of options to borrow from the Fed at low
    rates," Bernanke said.


    The Fed governor said he expects the nation's
    unemployment rate to remain at the current 6.4 percent and
    then fall to 6.0 percent by the end of next year.

 
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