Bernanke to aid recovery with gradual boost in dosage

Sun Aug 21, 2011 10:08am EDT
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By Mark Felsenthal

WASHINGTON (Reuters) - While it's not time for emergency measures, the patient still needs the drip.

The U.S. economy is grinding so painfully and haltingly toward recovery that the Federal Reserve looks poised to incrementally strengthen the dosage to keep growth on track.

Expect Fed Chairman Ben Bernanke to use a speech at an annual central bank conference in Jackson Hole, Wyoming, next Friday to acknowledge his disappointment over the pace of growth, even downgrade his outlook, and explain which medicines left in the Fed's cabinet are best suited to fortify the economy.

He looks unlikely to reach for shock treatment.

"With the recovery grinding to a halt in the first half of this year and the economy operating perilously close to a second recession, the Fed will remain on guard against a negative surprise on growth, and will be willing to act accordingly," Millan Mulraine, an economist with TD Securities, wrote in a note to clients.

So, how is Fed to administer further remedies?

With interest rate tools well exploited, Bernanke is most likely to focus on the Fed's balance sheet and opt for tinkering with the size and composition of its portfolio to get the world's largest economy out of its funk.

Interest rates are already near zero, and the central bank's policy-setting Federal Open Market Committee just two weeks ago signaled it is willing to hold borrowing costs at rock bottom levels for two years if necessary. There is little more that can be achieved using the rates tool.   Continued...

<p>U.S. Federal Reserve Chairman Ben Bernanke testifies before the Senate Banking, Housing and Urban Affairs Committee hearing on Enhanced Oversight After the Financial Crisis: The Wall Street Reform Act at One Year on Capitol Hill in Washington, July 21, 2011. REUTERS/Yuri Gripas</p>