BOSTON (Reuters) - Federal Reserve Chairman Ben Bernanke on Friday offered his most explicit signal yet that the U.S. central bank was set to ease monetary policy further, but provided no details on how aggressively it might act.
Bernanke warned a prolonged period of high unemployment could choke off the U.S. recovery and that the low level of inflation presented an uncomfortable risk of deflation, a dangerous downward slide in prices.
"There would appear -- all else being equal -- to be a case for further action," Bernanke said at a conference sponsored by the Boston Federal Reserve Bank.
With overnight interest rates already close to zero, many economists expect the Fed to launch a fresh round of bond purchases, perhaps on the order of $500 billion, to push borrowing costs lower at its next policy meeting on November 2-3.
Prices for longer-dated U.S. government debt fell after Bernanke's remarks as investors bet the Fed would be successful in generating more inflation. Stocks were mixed while the dollar briefly hit an eight-month low against the euro.
Bernanke said the central bank could bolster its economy and inflation-lifting efforts by indicating a willingness to hold interest rates low for longer than currently expected.
The Fed pushed overnight rates to zero in December 2008 and then bought $1.7 trillion in U.S. government and mortgage-linked bonds to offer more support for the economy.
Officials have said further asset buying, or quantitative easing, would be the course they would most likely pursue to spur a stronger recovery.
Bernanke indicated Fed policymakers were still weighing how aggressive they should be, leaving markets to guess as to the details of any operation.
"The only question left is the size and scope of QE," said Boris Schlossberg of GFT Forex in New York.
STILL WEIGHING THE COSTS
Bernanke said that while the central bank has the tools to ease policy further, it still needed to proceed cautiously.
"Nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used," he said.
The Fed's easy monetary policy, which pushed the dollar to a 10-month low against a broad basket of currencies on Friday before the greenback reversed course, has drawn the ire of emerging market economies contending with a flood of capital as investors chase higher yields.
Many countries, worried about weak exports as well as potential asset bubbles, have taken steps to temper the rise in their currencies, sparking fears of a series of competing devaluations.
Even though the deep U.S. recession ended in June 2009, unemployment still hovers at a lofty 9.6 percent, and Bernanke noted that core inflation, as measured by the Fed's favorite gauge, has risen at just a 1.1 percent annual rate this year.
He emphasized that Fed officials would like to see inflation at about 2 percent or a bit below.
The government said on Friday that the core consumer price index, a better-known inflation gauge, had risen just 0.8 percent over the 12 months through September, the smallest annual gain since 1961.
At the Fed's last policy-setting meeting on September 21, officials debated the possibility of introducing an explicit inflation target and other ways in which they could lift inflation expectations to spur economic activity.
Bernanke made clear that a shift in communications policy could be a powerful tool in helping to ease financial conditions, and said the Fed could use its post-meeting statements to convince markets rates are going to stay low for longer than they currently expect.
(Additional reporting by Steven C. Johnson in New York and Mark Felsenthal and Pedro da Costa in Washington; Writing by Mark Felsenthal; Editing by Tim Ahmann and Andrea Ricci)
