Much of the speech, delivered at the Fed's annual retreat at Jackson Hole, WY, made a case for the effectiveness of the central bank's easy-money policies since 2007, including "nontraditional" actions such as QE1, QE2, and Operation Twist.
The Fed chairman said that the stimulus purchases "have provided meaningful support to the economic recovery while mitigating deflationary risks."
And in a hint to expect more of the same — namely, QE3 — Bernanke said that the costs of such policies, "appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant."
Bernanke also voiced concern over the sluggish economic recovery, and in particular the "painfully slow" improvement of the U.S. unemployment rate, which has changed little in 2012.
That's the sort of bad economic news that has pushed the Fed to take action in the past.
Hints of QE3
"It is important to achieve further progress, particularly in the labor market," Bernanke said in his Jackson Hole speech. "Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."
While not an outright promise of QE3, the statement suggests it ranks highly among the actions the Fed is considering.
"Given Bernanke's remarks, additional monetary stimulus seems more likely than it did," Mark Vitner, a senior economist at Wells Fargo Securities LLC told Bloomberg News. "It is not 100%, and the timing is an even greater question."
More detail on the Fed's next moves is expected when the policy-setting Federal Open Market Committee (FOMC) meets Sept. 12-13.
At least one bank sees QE3 coming sooner rather than later. In a July 26 note, Bank of America Corp. (NYSE: BAC) said it expected the Fed to announce a $600 billion quantitative easing program in September.
What the Fed Might Do
Regardless, unless the economic news brightens considerably in the coming weeks and months, further Fed action of some kind is almost a certainty.
Minutes released from the last FOMC meeting Aug. 1 already showed increasing sentiment toward a significant policy move. Several members said the Fed would need to provide more stimulus "fairly soon" unless the economic data began to show signs of a "substantial and sustainable strengthening."
But if FOMC decides it is still too early for QE3, it may go with a more moderate option.
One of the most likely moves is a further extension of the Fed's pledge to keep interest rates at zero through 2014.
Some members of the committee have suggested replacing the calendar target with a trigger linked to a particular statistic. For instance, the Fed could say that rates will stay near zero until unemployment drops to a specific number, or when gross domestic product (GDP) hits a specific number.
Two other options were mentioned at the last FOMC meeting a month ago. One was to cut the interest rate it pays to banks on reserves they keep at the Fed, which could drive some money back into the economy. The other was a plan to provide cheap funding for some types of lending such as mortgages, much a similar program at the Bank of England.
But given its potential to boost stocks, most observers would prefer QE3 to any of those. In his Jackson Hole speech, Bernanke made it clear he's getting closer to taking the plunge.
"Ben Bernanke recognizes that he's going where no man has gone before with these nontraditional stimulus measures," Erik Davidson, deputy chief investment officer for Well Fargo Private Bank, told CNBC. "He recognizes that there's a cost-benefit to that, that there's a trade-off, that the potential cost of that is much more significant than traditional monetary policy. He's cautious to use it, but he certainly will."
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