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US Federal Reserve Chairman Hints at New Stimulus Action

U.S. Federal Reserve Chairman Ben Bernanke says the American economy may need new stimulus measures. But with short-term interest rates already close to zero, he says the central bank has to consider "non-conventional" ways of stimulating the economy.

U.S. Federal Reserve Chairman Ben Bernanke has been saying for some time that unconventional steps may be needed to bring the American economy back to strength.

In a speech in Boston on Friday, he gave a green light.

Bernanke said inflation is around one percent now, when the Federal Reserve's Open Market Committee has suggested it should be closer to 2 percent. "Thus, in effect, inflation is running at rates that are too low relative to the levels that the Committee judges to be most consistent with the Federal Reserve's dual mandate in the longer run," he said.

That dual mandate, controlling inflation and keeping unemployment low, is what U.S. Congress has given to the Federal Reserve. But unemployment is now around 10 percent - and Bernanke has warned that prolonged high unemployment could get in the way of an economic recovery. "Given the Committee's objectives, there would appear--all else being equal--to be a case for further action," he said.

The fed can hardly lower short-term interest rates any further, and it has already bought up billions of dollars in mortgage debt. So the expectation is that it will pump more money into the economy by buying government securities - a policy known as quantitative easing. The hope is that it will lower long term borrowing costs.

But economists say banks are generally reluctant to lend, while firms remain nervous about the economic outlook.

Paul Ashworth of Capital Economics in Toronto, Canada, says many households are focused on paying down existing debts and many cannot take advantage of historically low mortgage rates. "The uncomfortable truth is that with short term interest rates at zero - and they've been at near zero now for almost two years - the fed is left with trying basically untested and not necessarily as effective measures,and the problem is that in current circumstances they're not necessarily going to be very effective," he said.

Economists say quantitative easing could also push down the value of the dollar, which has been sliding in value since last summer.

The actual measures may be announced at the Fed's next policy meeting in early November.