Fed Has Tools If Economy Weakens, Bernanke Says

The U.S. economy grew even more slowly during the second quarter than the government first thought, according to a Commerce Department report out Friday. U.S. GDP grew at an annual rate of 1.6 percent; the earlier estimate was 2.4 percent. Meanwhile, at a gathering of central bankers in Jackson Hole, Wyo., Federal Reserve chairman Ben Bernanke said the Fed has the tools to stimulate the economy if it continues to weaken.

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LINDA WERTHEIMER, host:

The U.S. economy grew even more slowly during the second quarter of this year than the government first thought. That is the word from the Commerce Department this morning. It reported that the nation's Gross Domestic Product grew at an annual rate of 1.6 percent. The earlier estimate was 2.4 percent. Meanwhile, the chairman of the Federal Reserve, Ben Bernanke, said the Fed has the tools to stimulate the economy if it continues to weaken. He was addressing a gathering of central bankers in Jackson Hole, Wyoming.

To talk about his speech, we're joined by NPR's Jim Zarroli. Jim, it sounds like the Fed chairman was trying to be reassuring. He talked about how, next year, he thinks we'll be better. Did he actually say he was going to do anything?

JIM ZARROLI: You know, not really. There was a lot of buildup before this speech. A lot of people feel that Washington is paralyzed by the election, so it's up to the Fed to try to fix the economy, and it's not clear it can. I mean, the Fed has already lowered interest rates, you know, about as much as it can. So people thought Bernanke would use this speech to make some kind of policy pronouncement. Instead, he just used it, really, to tell people, look. We still have the tools to try to fix this economy, if we decide to use them.

WERTHEIMER: Did he talk at all about what some of those tools might be?

ZARROLI: This was probably, I think, the one really new thing in the speech. He did go into some detail the tools at the Fed's disposal and what the benefits and risks of using them would be. The first one is that the Fed could buy a lot more Treasury bills, which is a way of pumping money into the economy. Second, it could issue a statement making it much clearer, more explicit that it will keep interest rates low for a long time. And then third, it could reduce the interest rate it pays on bank reserve, so banks would have less incentive to hold onto their money.

Right now, one of the problems is that banks have tightened credit standards, especially for small businesses, and they aren't lending. By lowering the interest rates, it would be more profitable for them to lend the money out.

WERTHEIMER: If the Fed were to take these kinds of steps, if this would get the economy moving, why haven't they already done it?

ZARROLI: Well, to some extent, they have. I mean, for instance, it has already bought a lot of Treasury, but it's keeping the purchases at a particular level. Now it's saying, you know, we could buy more. The problem is this would increase the Fed's balance sheet and get people worried about inflation, or take the idea of lowering the interest rate on bank reserves. One of the problems there is that interest rates are already low, so you probably would only get an incremental effect there. It wouldn't be very large.

WERTHEIMER: He talked about what he might do if economy deteriorates more. He said the economy was inherently uncertain. It was vulnerable. What was his tone? I mean, just reading this speech, it sounds kind of scary and pessimistic.

ZARROLI: I think the point of the speech is really to tell people - not to lay out a specific plan, but to sort of send a message to people, to investors, to the financial markets that we haven't given up yet. We think the economy will continue to grow, albeit at a slow pace. But if it doesn't, we still have things we can do. The problem is this: The Fed can basically make more money available to the financial system, but there's already a lot of money in the system. Companies are sitting on a lot of cash. Banks have large reserves. But they aren't going to use it unless they feel confident that they will make money doing so. And right now, there just isn't that much confidence in the economy. It's really a problem of psychology, as much as anything else. And in cases like this, there's just a limit to what the Fed can do.

WERTHEIMER: NPR's Jim Zarroli. Jim, thanks.

ZARROLI: You're welcome.

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