Bernanke primes printing press

Federal Reserve chief hints at third round of stimulus measures to bolster lacklustre recovery in United States

The Federal Reserve stands ready to pump billions more into the world's biggest economy amid "grave" concern over the US jobs market, chairman Ben Bernanke said yesterday.

Mr Bernanke's hotly anticipated speech at the Jackson Hole symposium in Wyoming stopped short of explicitly endorsing a third round of money-printing – so-called QE3. But he said the Fed "will provide additional policy accommodation as needed to promote a stronger economic recovery".

The US recovery was "far from satisfactory" and the US must not lose sight of the "daunting economic challenges" confronting it, Mr Bernanke warned.

"The stagnation of the labour market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years," the chairman added.

His hints on more stimulus for the US were less explicit than a month ago when rate-setters said more aid for the economy would be needed "fairly soon". But the chairman's comments on the jobs market are significant, as the Fed has a dual mandate of both controlling inflation and encouraging full employment. The US unemployment rate rose to 8.3 per cent in July and a further worsening of the numbers in August's non-farm payroll figures will be pored over by rate-setters on the Federal Open Market Committee at their meeting on 13 September.

Rob Carnell, ING Bank economist, said: "Though we believe consensus for action exists, next week's payrolls will be pivotal. More substantive easing might require some clear weakening in the numbers, which given the labour market's inherent unforecastability, remains a toss of a coin.

"The best argument for additional meaningful monetary policy easing in September remains that the following meeting in late October is too close to the November presidential election to be used, and the later meeting in early December is too far away to be practical."

Exactly two years ago, Mr Bernanke trailed the second $600bn round QE, which the Fed began three months months later. Alongside full-blown quantitative easing, Mr Bernanke's other options include an extension of the Operation Twist programme, where the Fed sells short-term debt and buys longer-dated bonds to bring down long-term interest rates.

The Fed has already signalled that interest rates will remain at between 0 per cent and 0.25 per cent until 2014 at the earliest, although it could signal that it is willing to extend this guidance further still.

The chairman defended the first two rounds of QE in 2009 and 2010 – worth $2.3trn in total – arguing that the move created at least 2 million jobs in the past three years. The Fed "should not rule out" new policies to improve the job market, he added.

He also fired a warning at squabbling politicians over the potential impact of the "fiscal cliff" next year. Because of the failure of the Congressional bi-partisan "super committee" to agree on deficit reduction measures last year, automatic cuts are looming which could knock some 3.5 per cent – or $500bn – off growth next year.

Mr Bernanke said: "It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs. However, policymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery."

Markets were barely moved amid fading expectations of an explicit commitment to QE in the run-up to the speech. John Canally, investment analyst at LPL Financial, said: "The market was looking for him to not throw any cold water on the prospects for QE, and he didn't throw any cold water on it. He didn't come out of the box saying that there has been substantial and sustainable improvement in the economy. Because he didn't do that, I think it's just a matter of time. Anyone in the market today who thinks he was going to just come out and say we are going to do QE is just naive."